Discretionary trust - over-distribution

Discretionary trust - over-distribution

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We have recently prepared the annual accounts of a discretionary trust for the year ended 5 April 2010 and the distributions exceed the income. The only asset is commercial property. Extra distributions were made to the beneficiaries on 1 April 2010 in the misguided belief that they would be taxed at 40% instead of 50%. There was sufficient cash available as the trust receives rents in advance but as the accounts are on the accruals basis and as a very large trust tax liability now arises (because of the excess distributions) the income account is in debit.

How do we deal with the excessive distributions on the trust tax return (Boxes 14.1 to 14.14)? I assume that as the trustees believed they were distributing current income that the distributions should be treated as income distributions of 2009/10 and 40/60ths shown on the R185s. However, once I explain the position to the trustees (especially the fact that the "advanced" income will be taxed at 50% in the trust but credited at only 40% on the beneficiaries' returns) could they then decide that the payments were in reality either (a) capital distributions or (b) loans to the beneficaries pending a 2010/11 income distribution?

Also, if this has to be treated as an income distribution in 2009/10 how should we describe the excess income distribution on the trust balance sheet?

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By Phil Rees
11th Jun 2010 16:02

(b) loans to the beneficaries pending a 2010/11 income distribut

But does the instrument give the trustees power to lend money to beneficiaries?

(Not that a discretionary trust actually has any beneficiaries as such, but one uses the term for brevity.)

 

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By nick farrow
06th Jan 2012 13:07

any news on this?

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