The following Trusts and Inheritance Tax guidance note by Tolley provides comprehensive and up to date tax information covering:
This guidance note follows on from the Discretionary trusts ― tax pool guidance note, which explains how the tax pool is calculated.
The ‘tax pool’ is a record of the tax paid from year to year by the trustees of a discretionary trust, which funds the tax credits available to the beneficiaries. If the tax credits on distributions to beneficiaries exceed the amount available in the tax pool, an additional charge is made on the trustees.
This guidance note explains the effect of the mismatch between the rates of tax on trust income and the beneficiaries’ tax credit, and considers how to use the tax pool efficiently.
The distribution of dividend income always results in a tax credit for the beneficiary which exceeds the tax contributed to the pool by that income. This is because both the dividend trust rates and the dividend ordinary rate are lower than the trust rate. In addition, for years up to 2015/16, the 10% tax credit on dividends received was a notional tax and did not go into the tax pool. A comparison of the shortfall, before and after the dividend tax changes, is quantified as a percentage of the net dividend in the following tables:
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