Claiming back tax paid on savings income in discretionary trust

[fourtwentyfour]

A settlor-interested discretionary trust has savings income from NS & I Income Bonds. The first £1000 of interest is taxed at 20%. and the remainder at 45%.

The tax must be paid by the settlor and included in his return. It can be claimed back by the settlor if appropriate.

Does anyone know how the savings interest from this trust should be treated in the settlors refund calculation, as savings or as earned income? (Earned income is taxed above a threshold, Savings have tax free status, up to a point.)

Thanks

[fourtwentyfour]

I suppose no one knows, as this is difficlult, even for HMRC?

[genou]

A settlor-interested discretionary trust has savings income from NS & I Income Bonds. The first £1000 of interest is taxed at 20%. and the remainder at 45%.

The tax must be paid by the settlor and included in his return. It can be claimed back by the settlor if appropriate.

Does anyone know how the savings interest from this trust should be treated in the settlors refund calculation, as savings or as earned income? (Earned income is taxed above a threshold, Savings have tax free status, up to a point.)

Thanks

I do not follow your question. The settlor is entitled to reclaim the tax they have paid from the trustees ( or other beneficiary ). The repayment they receive is not income, and does not figure in their tax return.

[helfordpirate]

The trustees should provide you (the settlor) with a form R185(Settlor) this will detail how much savings income they have received from the NS&I bonds and how much tax they have paid at the basic rate and the trust rate.

As the trust is settlor-interested, you are liable for tax on the income received by the trustees as it arises - essentially as if the trust did not exist. Any discretionary income payment to you by the trustees as a beneficiary is not taxable and does not need to be reported (whereas for a normal trust it is taxable to the beneficiary). The trustees still have to pay tax on the trust income but any difference in the tax already paid by the trust and the tax that you would owe on the gross income is refundable to you.

You can claim back tax on form R40 (Claim for tax repayment on savings). The notes here https://www.gov.uk/government/publicati ... 85-settlor explain what boxes on the R185 you copy to boxes on the R40 (in the Trust Section). Or you can claim it in your tax return.

To answer your question, as you are taxed directly on income as it arises, the type of income is the same - savings income for the trustees is savings income for you, dividends for the trustees is dividends to you.

[Kantwebefriends]

To answer your question, as you are taxed directly on income as it arises, the type of income is the same - savings income for the trustees is savings income for you, dividends for the trustees is dividends to you.

Does that mean that income from Index-Linked Savings Certificates goes untaxed both within the trust and for the settlor?

[fourtwentyfour]

I might have been unclear. Income Bonds within the Trust generated interest, and that was taxed within the Trust and tax was paid.

However the income is treated as being that of the Settlor, it’s a Settlor Interested Trust, a special case. The Settlor is liable for the tax. This means he can include the tax paid in his return, and if a repayment is received he must pay it back to the Trust.

My question was how should be interest refund be treated within the Settlor’s account, as earned income, or savings income (which it was, in the Trust).

The answer suggests it retains the same status, ie is savings income. I think that HMRC got it wrong when they treated it as earned income, and as a result refunded less than expected.

For the last post, Index-Linked Savings Certificates would be taxed by the Trust, if it were a normal trust, but refunded if appropriate as described above, if Settlor Interested. (I think!)

[Parky]

NS&I Index-Linked Savings Certificates are tax-free.

[helfordpirate]

I think that HMRC got it wrong when they treated it as earned income, and as a result refunded less than expected.

HMRC will treat the income as the settlor indicated either on the R40 Settlor Interested Trust form or on the SA107 Trust Income supplementary pages to the self-assessment return. The settlor should report the income as it is reported to them on form R185 by the trustees. If it was savings income to the trust, it is savings income to the settlor.

Sounds to me that the settlor has not reported it correctly, not that HMRC have treated it wrong.

[Kantwebefriends]

NS&I Index-Linked Savings Certificates are tax-free.

Suppose a settlor-interested discretionary trust has passed its accumulation period and is invested entirely in ILSCs. Does this mean that the income paid out to the settlor is tax-free in her hands?

Secondly, what the best way to pay out the income? Let each certificate mature, perhaps, roll over the capital, take the income as cash and distribute it to the settlor?