Trusts and Inheritance Tax

Making use of the tax pool

Produced by Tolley
  • 03 Nov 2021 11:51

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

  • Making use of the tax pool
  • Introduction
  • Dividends
  • Standard rate band
  • Changes in tax rates
  • The beneficiary’s tax position
  • Keep a record of available income
  • Distinction between undistributed and accumulated income
  • Use the tax pool before it expires
  • Minimise the effect of high rates of tax on trust income
  • More...

Making use of thetax pool

Introduction

This guidance note follows on from theDiscretionary trusts ― tax pool guidance note, which explains how thetax pool is calculated.

The ‘tax pool’ is a record of thetax paid from year to year by thetrustees of a discretionary trust, which funds thetax credits available to thebeneficiaries. If thetax credits on distributions to beneficiaries exceed theamount available in thetax pool, an additional charge is made on thetrustees.

This guidance note explains theeffect of themismatch between therates of tax on trust income and thebeneficiaries’ tax credit, and considers how to use thetax pool efficiently.

Dividends

The distribution of dividend income always results in a tax credit for thebeneficiary which exceeds thetax contributed to thepool by that income. This is because both thedividend trust rates and thedividend ordinary rate are lower than thetrust rate. In addition, for years up to 2015/16, the10% tax credit on dividends received was a notional tax and did not go into thetax pool. A comparison of theshortfall, before and after thedividend tax changes, is quantified as a percentage of thenet dividend in thefollowing tables:

2015/16££
Net dividend received900
Dividend plus tax credit(900 + 100)1,000
Dividend trust rate tax credited to tax pool @ 27.5%(37.5% – 10%)275
Available for distribution after tax(900 – 275)625
Tax credit on distribution(45/55 x 625)511
Tax in tax pool as % of net dividend(275/900 x 100)30.55%
Beneficiary’s tax credit as % of net dividend(511/900 x 100)56.78%
Shortfall as % of net dividend(56.78 – 30.55)26.23%
2016/17££
Dividend received900
Dividend trust rate tax credited to tax pool @ 38.1%343
Available for distribution after tax(900 – 343)557
Tax credit on distribution(45/55 x 557)456
Tax in tax pool as % of dividend(343/900 x 100)38.1%
Beneficiary’s tax credit as % of dividend(456/900 x 100)50.67%
Shortfall as % of net dividend(50.67 – 38.1)12.57%

It can

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