TSEM3477 - Trust income and gains: vulnerable beneficiaries: claims to special tax treatment: computing the amount of relief: income tax - trust management expenses example
The details for this example, for the 2020-21 tax year, income was received from bank interest £15,000, dividends £20,000 and rental income of £20,000 in addition:
- The trustees have paid allowable management expenses of £4,500 and
- There are two beneficiaries.
The trustees hold the money on deposit at the bank and the shares for the benefit of the vulnerable beneficiary and they hold the rental property for the benefit of the other beneficiary. The property held for the benefit of the vulnerable beneficiary is therefore a defined part of the settled property and a valid election is in force. The savings and dividend income is qualifying trusts income but the rental income is not.
Income used to pay allowable management expenses is charged at the basic, lower or dividend ordinary rate. The expenses are first set against dividend income and in this case they will be set off in full against this income. The expenses are then grossed up at the appropriate tax, in this case the dividend ordinary rate (7.5%).
| Income | Amount | |
|---|---|---|
| A. | Qualifying trusts income | (£15,000 + £20,000) = £35,000 |
| B. | Non-qualifying trusts income | £20,000 |
| C. | Total income | £55,000 |
| D. | Proportion of management expenses attributable to non-qualifying income (4,500 x B/C) | £1,637 |
| E. | Management expenses attributable to qualifying trusts income (4,500 - D) | £2,863 |
| F. | Management expenses are set against dividend income and grossed up (E x 100/92.5) | £3,096 |
For the purposes of calculating TQTI, it is only necessary to work out the trustees’ liability in respect of the qualifying trusts income (before making the claim for special tax treatment). In this case it is:
| Income | Savings | Dividend | Total |
|---|---|---|---|
| Income | £15,000 | £20,000 | - |
| Income used to pay management expenses | - | £3,096 | - |
| Tax rate | - | 7.5% | - |
| Tax chargeable | - | £232.20 | £232.20 |
| Remaining income | £15,000 | £16,904 | - |
| Tax rate | 45% | 38.1% | - |
| Tax chargeable | £6,750.00 | £6,440.42 | £13,190.42 |
| TQTI | - | - | £13,422.62 |
The vulnerable person has no personal income or gains in the year and so the amount of TLV2 is nil.
TLV1 (the amount of additional tax that the vulnerable person would pay if the qualifying trusts income arose directly to him or her) is:
| Income | Savings | Dividend | Total |
|---|---|---|---|
| Income - actual | - | - | - |
| Income treated as arising to the vulnerable person | £15,000 | £20,000 | - |
| - | £15,000 | £20,000 | - |
| Less personal allowance | £12,500 | - | - |
| Taxable income | £2,500 | - | - |
| Savings First £5,000 @ 0% basic rate £1,000 @ 0% | £0 | £0 | - |
| Tax chargeable | £0.00 | £0.00 | £0.00 |
| Chargeable at dividend rate First £2,000 @ 0% then 7.5% | - | £14,500 | - |
| Tax chargeable | - | £1087.50 | £1087.50 |
| TLV1 | - | - | £1087.50 |
| Less TLV2 | - | - | £0.00 |
| VQTI | - | - | £1087.50 |
The reduction that the trustees can claim is TQTI - VQTI (£13,422.62 - £1087.50) = £12,355.12. Their actual liability is then calculated separately:
| Income | Non-savings | Savings | Dividend | Total |
|---|---|---|---|---|
| Income | £20,000 | £15,000 | £20,000 | - |
| Income used to pay management expenses | - | - | £3,096 | - |
| Tax rate | - | - | 7.5% | - |
| Tax chargeable | - | - | £232.20 | £232.20 |
| Remaining income | £20,000 | £15,000 | £16,904 | - |
| Tax rate | 45% | 45% | 38.1% | - |
| Tax chargeable | £9,000.00 | £6,750.00 | £6440.42 | £22,190.42 |
| Tax due | - | - | - | £22,422.62 |
| Tax due | £22,422.62 |
|---|---|
| Less reduction for special tax treatment | £12,335.12 |
| - | £10,087.50 |