Taxation of discretionary trusts—tax pool
Taxation of discretionary trusts—tax pool

The following Private Client guidance note provides comprehensive and up to date legal information covering:

  • Taxation of discretionary trusts—tax pool
  • The components of the tax pool
  • Tax credits on payments to beneficiaries
  • Calculation of the tax pool balance
  • The tax pool charge
  • Managing the tax pool charge
  • Effect of the mismatch in tax rates

FORTHCOMING CHANGE: As originally announced at Autumn Budget 2017 and followed up by written statement after Spring Statement 2018, plus an announcement in Budget 2018, the government ran a consultation on the taxation of trusts from 7 November 2018 to 28 February 2019, inviting views on the principles of transparency, fairness and simplicity that it believes should underpin the taxation of trusts. In response, in July 2019, the Office of Tax Simplification issued its second report on inheritance tax. See also the report published by the All-Party Parliamentary Group for Inheritance & Intergenerational Fairness in January 2020 recommending the adoption of a new inheritance tax regime. See also the research exploring the use of trusts which was also published on 7 November 2018. See News Analysis: Exploring the consultation and review on the taxation of trusts.

The income of discretionary trusts is taxable on the trustees. When income is distributed to beneficiaries, they are treated as receiving it net of tax at the trust rate. The beneficiary receives a credit for the trust rate tax. If their personal rate of tax is lower than the trust rate, they are entitled to claim a repayment of the tax overcharged.

The ‘tax pool’ is a record of the tax paid from year to year by the trustees of a discretionary trust, which funds the