Chapter 3: Special rates for trustees’ income
Overview
1386.This Chapter provides the main rules about which income is to be charged at either the trust rate or the dividend trust rate.
1387.The main category is “accumulated or discretionary income” which, broadly, is income which is income of trustees under trust law and which is not assessable as income of any beneficiary.
1388.The Chapter also deals with other specific types of receipt to which one or other of the special trust rates apply.
Section 479: Trustees’ accumulated or discretionary income to be charged at special rates
1389.This section applies one of two special trust rates to trustees’ accumulated or discretionary income. It is based on section 686(1), (1AA), (2) and (5A) of ICTA.
1390.The special rates apply to the trustees even where the receipt will be taxed as the income of the settlor. The settlor will receive credit for the full amount of tax paid by the trustees.
1391.Subsection (1) introduces the term “accumulated or discretionary income” which is defined in section 480. The fact that this section does not apply to charitable trusts is given greater prominence than in the source legislation.
1392.Subsections (2) to (4) provide that accumulated or discretionary income is charged at either the dividend trust rate or the trust rate instead of the rates that would otherwise apply to that income.
Section 480: Meaning of “accumulated or discretionary income”
1393.This section defines “accumulated or discretionary income”. It is based on section 686(2), (6ZA), (6ZB) and (6A) of ICTA.
1394.“Accumulated or discretionary income” is a single concept rather than the sum of two separate elements.
1395.Subsection (2) is based on section 686(2)(a) of ICTA. This provision spells out the nature and extent of the discretion concerned in more detail than in the source legislation.
1396.Income is not included within “accumulated or discretionary income” simply because trustees have discretion over what expenses to incur or how those expenses are to be charged.
1397.Subsection (3)(a) excludes from the meaning of “accumulated or discretionary income” any income to which a beneficiary is entitled as it arises. This is the case where a beneficiary has an interest in possession.
1398.Subsection (3)(b) and subsection (4) exclude income that arises to certain pension funds, provided that the property giving rise to the income is not held as a member of a property investment LLP (see the definition in section 1004).
1399.Subsection (3)(c) and subsections (5) and (6) exclude income from service charges held on trust by certain bodies.
Section 481: Other amounts to be charged at special rates for trustees
1400.This section applies one of the special trust rates to certain receipts of trustees that are taxed as income. It is based on sections 686 and 686A of ICTA.
1401.The special rates apply to the trustees even where the receipt will be taxed as the income of the settlor. The settlor will receive credit for the full amount of tax paid by the trustees.
1402.Subsection (1) sets out the circumstances in which the section applies. The exemption for charitable trusts, which was in section 686A(4)(c) of ICTA before it was amended by FA 2006, has been reinstated. See Change 85 in Annex 1.
1403.Subsections (2) to (4) apply the trust rate or dividend trust rate to the receipt arising to the trustees instead of the rate that would otherwise apply to that income. The only receipt to which the dividend trust rate applies is Type 1 within section 482.
1404.Subsection (5)(a) and (b) ensure that receipts are not caught by this section if they are accumulated or discretionary income (and so within section 480) or would be but for the exceptions in section 480(3)(a) or (c). This exemption, which was in section 686A(4)(a) before it was amended by FA 2006, has been reinstated. See Change 85 in Annex 1.
1405.Subsection (5)(c) and subsection (6) correspond to the exception in section 480(4)(a). That exemption, which was in section 686A(4)(d) before it was amended by FA 2006, has been reinstated. See Change 85 in Annex 1.
Section 482: Types of amount to be charged at special rates for trustees
1406.This section lists the types of receipts arising to trustees that are taxed at one of the special trust rates under section 481. It is based on section 686A(2) of ICTA.
1407.Section 686A(2) did not include amounts taxed on trustees under the accrued income scheme and liable at the trust rate by virtue of section 720(5) of ICTA. As it is intended that all amounts that are always liable at the trust rate are treated in the same way, those amounts are included here as Type 2 income. See Change 86 in Annex 1.
Section 483: Sums paid by personal representatives to trustees
1408.This section concerns the treatment of sums paid by personal representatives to trustees. It is based on section 686(6) of ICTA.
1409.The section applies if personal representatives have received income or other amounts which would have been liable at the special trust rates had they been trustees, and they pay a sum to trustees representing income. In such a case, the sum is treated as income of the trustees and as having borne tax at the rate referred to in section 663(1) of ITTOIA.
1410.Following its substitution by FA 2006, section 686A of ICTA no longer includes the provision that specifically applied this rule to receipts within section 686A. But the reference in section 686(6) of ICTA to income to which section 686 applies includes receipts deemed to be such income as a result of section 686A. Accordingly, it is made explicit that this rule applies to all receipts within this Chapter.
