Trust income, R185 form

Trust income, R185 form

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I am being asked to reclaim tax paid on trust income. The client is a trustee but she has not prepared the R185 form (done by a solicitor). However, the trust paid tax on income received when the top rate of tax was 50% but the tax on the R185 is shown as 45/55 because when the trust income was distributed the top rate of tax was 45%.

Secondly the solicitor has not claimed any tax relief for his fees in dealing with the tax return, distributing the income etc. which has been deducted from the income before calculating the distribution. This further devalues the tax credit.

Guidance please, should the tax credit be calculated at the rate in force when the trust received the income or when it was paid out to beneficiaries. Can you use the beneficiary's share of income before paying fees to calculate the tax credit if no tax allowance has been claimed for the fees.

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By Tim Vane
02nd Apr 2015 10:17

The beneficiary just enters the net figure from the R185 onto their personal return. The tax credit isn't even required for the personal return as it will be calculated automatically at the rate for the year (45%). The trust may have paid tax at a different rate but that is irrelevant to the income beneficiary, it will just have increased the tax pool for the trust.

If your client is the trustee then she does not have to do anything other than pass the R185 to the beneficiary.

What tax relief are you expecting the solicitor to claim? They should have deducted their fees from the income charged to the trust, but only against the proportion of income charged at the trust rates.

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By LyneT
02nd Apr 2015 11:15

It is the tax rate in force at the date of distribution which would go on Form R185.

The tax relief in respect of the solicitor's fees is set off against the income of the trust when calculating the liability of the trust.  It reduces the trustees' tax liability and has no relevance to the tax position of the beneficiary other than reducing the amount which is available for distribution.

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By Barry Hawkins
07th Apr 2015 22:11

Trust Income R185

The client does not need to do a personal return, I was going to use a R40 form which does ask for the amount of tax paid or tax credit (box 4.3). However, the HMRC guidance notes do not indicate what to do if the total tax paid by the trust is greater than the total of tax credits on all R185's issued. If a balance is left in the tax pool of the trust is that just lost when the trust is wound up (which it has been).

 

With regards to the solicitors fees, in the trust accounts they are split between a charge for distributing the capital funds of the trust and a charge for administering (including tax returns) and distributing the income earned by the trust. I was therefore surprised that tax has been calculated and paid on the gross income of the trust, not the net income after charging the element of his fees for administering and distributing the trust income. 

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