Income from trusts and settlements
Income paid out by trusts and other forms of settlement in 2009–10 comes with a tax credit which reflects the amount of tax already deducted from it or deemed to have been paid on it. What you receive is the net (after-tax) amount of income.
To find the gross (before-tax) amount, you need to add back the tax credit. You can find out the amount of the tax credit from certificate R185 or similar statement the trustees should give you.
How trust income is taxed
The amount of the tax credit depends on the type of trust:
- trust with an interest in possession where you have the ‘absolute right’ to the income from the trust. The tax credit will be at the rate of 20 per cent of the grossed-up amount of interest; 10 per cent of the grossed-up amount of share dividends and unit trust dividend distributions; and for other sorts of income, such as rents or royalties, it will be at the basic rate of tax – 20 per cent for 2009–10
- a discretionary trust where the trustees have discretion about paying out the income. The tax credit will be at the ‘rate applicable to trusts’, which in 2009–10 is 40 per cent of the grossed-up income or 32.5 per cent for share dividends and distributions. (From 2010–11 the rates applicable to trusts will rise to 50 per cent and 42.5 per cent.)
- accumulation and maintenance trusts – the income also comes with a tax credit of 40 per cent or 32.5 per cent in 2009–10
- trust for a disabled person or minor child following death of a parent – the income may be taxed on the basis of the beneficiary’s personal circumstances taking into account their allowances and tax bands.
Review of trust taxation
The government is considering, in future, taxing income from a discretionary trust at 10 or 20 per cent as appropriate rather than 40 per cent (or 50 per cent) where the income is paid out to beneficiaries by 31 December following the year in which the income arose.
If the tax credit, other than the 10 per cent credit on share dividends and similar income, is more than the amount of tax you would have paid if the grossed-up income had come direct to you, you can claim a rebate. For example, if you get interest from a trust and your income – including the grossed-up trust income – is too low to pay tax, you could reclaim all the tax credit which comes with it. With a discretionary trust, anyone not liable to higher rate tax can reclaim part of the tax credits.
Tax-saving idea - tax credits
Reclaim some or all of the tax credit that comes with income from trusts if it is more than you would have paid if the income had come straight to you. Unless you pay tax at the higher rate, you will always be entitled to a rebate on income from a discretionary trust.