Calculation of vulnerable beneficiary relief

Produced by Tolley
Calculation of vulnerable beneficiary relief

The following Trusts and Inheritance Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Calculation of vulnerable beneficiary relief
  • Calculation of income tax relief
  • Relief for interest in possession trusts
  • Relief for discretionary trusts ― income accumulated
  • Relief for discretionary trusts ― income distributed
  • Calculation of capital gains tax relief
  • Non-UK resident beneficiaries

This guidance note explains how income tax and capital gains tax relief for vulnerable beneficiary trusts is calculated and explains the effects of a claim in different circumstances. The qualifying conditions for the relief and procedure for making a claim for special tax treatment is described in the Vulnerable beneficiary trusts guidance note. The ‘special tax treatment’ is one claim for income tax and capital gains tax. You cannot choose to claim one without the other. However, the reliefs are calculated and declared on the tax return separately.

Calculation of income tax relief

The income tax concession for vulnerable beneficiary trusts is a tax reduction in the trustees’ income tax liability applied at Step 6 of the calculation of liability under ITA 2007, s 23. It is applied after any other reduction to which the trustees are entitled.

The aim of the relief is to bring the trustees’ tax liability down to what the vulnerable beneficiary’s tax liability would be on the trust income if it had arisen to him directly.

Essentially, the calculation involves a comparison of two amounts:

  1. trustees’ income tax liability without relief (referred to in the legislation as TQTI)

  2. the additional tax that the beneficiary would pay if the trust income were his income (referred to in the legislation as VQTI)

The difference between the two is the amount of the relief. In other words, by applying the relief, TQTI becomes VQTI.

FA 2005, s 26

TQTI ― calculate the trust tax liability in the usual way. See the Interest in possession trusts - income tax and Discretionary trusts – income tax guidance notes.

Include tax deducted at source in the total tax liability.

If part of the trust fund does not qualify for relief, expenses must be apportioned between the qualifying and non-qualifying parts.

VQTI ― this is a calculation of a notional amount of additional tax for the beneficiary, which will be used as a substitute for the trustees’ standard liability, and is a three-step

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