A&M Trust Management Expenses

A&M Trust Management Expenses

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If an A&M trust has received gross savings income of £3,000 and management expenses are £1,000, what amount goes into the tax pool. I understand the tax payable by the trustees will be as follows:

Amount chargeable at trust rates 2,000 at 40% = 800
Amount chargeable at savings rate 1,000 at 20% = 200
Less tax deducted at source = (600)
Tax payable by trustees = 400

However, I have viewed a few sources which confuse the issue of what amount is then included in the tax pool for the purpose of calculating the additional tax payment arising from a payment made to a beneficiary.

Is £800 included in the pool or is it £1,000. TSEM3016b seems to suggest it will be £1,000 but other sources suggest it is only the amount chargeable at the trust rate i.e £800. It would make sense to me that it is £1,000 but would welcome another opinion.

Thanks
Lee Clackett

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By User deleted
20th Dec 2006 10:00

Isn't it paid and suffered ?
It is confusing, certainly. I approach it from perhaps the simplistic view that (leaving dividends aside-in any case, not relevant here) what goes ino the pool has to be the aggregate of tax deducted at source and what RAT the trusteees actually had to pay to HMRC.
I think the figures shown are wrong because surely the management expenses have to be grossed up at the savings rate?
So £1250 is deducted from £3000 ,leaving RAT due as £1750@40%= £700 less the £600 deducted at source. Total pool"credit" is £700.

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By User deleted
21st Dec 2006 10:15

Too much credit?
It ought to be straightforward but this is a bit of a devil , Lee ! It seems that we are sowing the seeds of doubt in each other's minds. Anyway, here goes again. Could I ask you to consider hard whether you are not actually seeking a credit twice: once by deduction from the nasty RAT bill and twice by lobbing it into the pool. The essence, without spelling out all the boring arithmetic , is that I would be looking to pay over only £100 to settle with HMRC whereas you would pay £350.
I too am proceeding on the basis of 2004/05 and therefore ignoring the new "non-RAT" bands. Do come back to the forum when the 2005 Return is processed and tell us what the Trust Office did.

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By lclackett
20th Dec 2006 11:55

Correction
Thank you for your comments.

You are quite right that the management expenses need to be grossed up by the savings rate.

That would leave:
1,750 at 40% = £700 as you say and,
1,250 at 20% = £250
Total £950

or depending on how you prepare the calculation:
1,750 at 20% = £350 (addl charge for income liable at trust rate)
3,000 at 20% = £600
£950

If what goes into the tax pool, as you say, is the aggregate of tax deducted being £600 (£3,000 at 20%) and the RAT actually payable to HMRC (£1,750 @ 40% minus £1,750 at 20%) = £350. Total figure is therefore £950 (as above to my thinking).

It therefore seems the pool credit is £950 but in examples I have seen it is only £1,750 at 40%= £700 which is what you seem to believe. I am more certain it is the higher figure but would not put a bet on it!

PS. I am looking at the 2005 tax return before I even start with 2006 so I know now that my reference in the original posting is not correct as this relates to the exemption limit of £500 for 2005/2006 and £1,000 for 2006/2007.

Thanks again.

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By lclackett
21st Dec 2006 11:27

Management expenses
Thanks again for your comments. I have been looking into this further and have now concluded in my own mind that I am certain that expenses are not if you like 100% tax relieved but rather that a lower rate of tax applies to that proportion of income covered by those expenses (however strange this may sound!) I strongly believe that £350 tax is payable (equivalent to 20% of £1,750) by the Trustees and not the £100 as you suggest.

However, where I have changed my opinion is regards to the 'tax pool'. Despite my understanding that in total the tax liability is £950, the credit in the tax pool is only £700 (the tax chargeable at trust rates). I.e. the 20% tax rate on the expenditure is ignored. I obtained only this morning tax bulletin issue 78 (on-line) which I found very useful on this subject albeit it was issued to cover the new "non-RAT" bands as you put it.

I am sorry if I have confused the matter but to be perfectly honest I was a trust 'virgin' until this week and so am going on a steep learning curve right now. Thanks for your comments again.

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By User deleted
27th Dec 2006 16:44

£700 correct
Tax £3,000 @ 20% = £600
£3,000 - (£1,000 * 100/80) = £1,750 @ 20% RAT = £350
Total tax payable = £950

Amount to go into tax pool is only that on income taxed at 40% = £1,750 @ 40% = £700

(If you work it out as shown above it is less confusing if you try to then do 22% + 18% on rents received, or have to allocate management expenses against different income types)

Amount to be put in the tax pool is £700 (ie tax on the income charged to RAT of £1,750), as that is all that is needed to frank the distributable income of £1,050.

You can check it with the following calculation:

Assuming no tax pool/undistributed income b/f -

Income received = £3,000
Less management expenses = £1,000
Less total tax payable (at source + SA) = £950
Net income available for distribution = £1,050

Maximum distribution therefore gross £1,750, tax £700, net £1,050

The £250 basic rate tax paid on the income used to pay trust expenses is unfortunately lost, but would not have been able to have been used even if put into the tax pool, unless the trustees were distributing income in excess of what was available to them. If the trust is operating correctly, this shouldn't be an issue, and the tax pool c/f should indicate
undistributed income c/f!!

HTH

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By lclackett
02nd Jan 2007 07:27

Thank you
Louise. Thank you for your comments and clear explanation. An extra tax charge was paid in the past as a result of the tax credit on distributions not being covered by the tax pool which I understand should not happen and agree the tax pool carried forward should represent tax on undistributed income. I now know this has arose as capital payments to beneficiaries from the proceeds of the sale of properties have incorrectly been regarded as income payments.

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