Reclaim tax from Discretionary Trust (life)

Is reclaiming tax on receipt of a discretionary trust surrender simply a matter of R185, then R80 ?

Didn't find your answer?

Apologies if breaching etiquette - newbie here. I have trawled other topics / answers. Can't find relevant response, although very educational!

I'm a  trustee for a Disretionary Trust set up in 2005 (N=12 in 2018) to pay university fees for the settlors' 2 grandsons.

The Trust contained a single product; a single premium, whole of life, joint lives assured policy investment bond, with benefits payable on 2nd death. 200 equal constituent segments. The 1st death was 2007.

The eldest grandson is in need of tuition fees next month. On enquiry to the provider, they advise that half (attributed to deceased) of any gains realised will be subject to 45% Trust Tax. This came as a bit of a surprise to the trustees and surviving settlor. However, HMRC guidance confirms the 45% rate on discretionary trust chargeable gains. The other half (attributed to surviving widow) of any chargeable gains benefits from averaging / top-slicing so will be free of further tax (she's some distance below HR threshold). I'm a little perplexed as to why half is taxed at such a punitive 45% and the other half benefits from averaging / top-slicing relief. No matter, if I can clarify how any tax paid might be reclaimed by the end beneficiaries.

The family's intention all along was to fully surrender whole numbers of segmental policies as required to pay annual tuition fees for their grandsons.  Fortunately, there will still be enough to pay the tax and leave sufficient for the tuition fees.

My question: Once I've registered the Trust with HMRC (this will be the 1st time any taxable gains have arisen to the Trust), fully surrendered the required number of segment policies to allow me to pay 25% marginal rate on half of the gain and leave enough net -of-tax to pay a year's tuition fees, is it simply a matter of filling in  R185(Trust) for the beneficiary and assisting him with an R80 to reclaim from HMRC the tax I deducted on form R185 ???   Neither beneficiary is likely to threaten the BR threshold, much less the HR theshold during the expected lifetime of the Trust as the intention is to wind it up after both grandsons have finished their university education (with equal distrubution of any residue)

Form R185(Trust) then R80 seems a bit too simple. That's all I can find on HMRC site. What have I missed? Is there a catch?

The provider company "experts" seemed not to know about beneficiary reclaims of Trust Tax, which is in itself a bit of a worry (big national company).

As an alternative, we could of course use up the 5% allowance amounts by partial surrender across all policies, but once fully utilised, the same question arises for the 1st chargeable gain therafter. The same question about beneficiaries reclaiming Trust Tax would also arise in the unhappy event of the 2nd death occurring (half of any final gain would be subject to 45%, it seems).

There's also the option of signing over a deed of irrevocable assignment to the beneficiaries, even if just for the number of segments for them to surrender to pay the fees each year (trustees retain some control over release of funds that way). As long as the segemnts are assigned before surrender, the tax liability then falls on the (non tax paying) uni students, so zero tax to pay. Not clear how the tax treatment of remaining trust bond / policy is affected by this, and it sounds even more complicated. there are also IHT implications of full assigment as a gift (without being unkind, the 2nd life assured is knocking on a bit!)

By the way, regarding the £1000 tax-free (or 20% technically) "allowance" to deduct from any gain before subjecting to 45% tax - Is this per annum, or is it only in 1st chargeable event year? (please tell me it's p.a. !)

If any more details needed for informed answer, just ask.

Thanks for any answers / suggestions.

G

Replies (4)

Please login or register to join the discussion.

avatar
By goat64
09th Sep 2018 13:05

(writing my own reply, as no other responses.)

I had a chat with a very helpful gentleman at HMRC, Trust tax office.
I stressed we (trustees) are OK about paying tax due but sought clarification about refunds / reclaims.

he (nice gentleman at HMRC Trust tax office) assured me that ALL income (from which I think he means any chargeable gain) is taxable at 45%. he talked me through the recent changes mandating Trust registration, which is a prelude to any reclaim anyway. As long as the beneficiaries are below HR threshold of income tax when any Trust benefits are received, he suggests that any Tax deducted before they receive it (i.e. any tax I , as Trustee, have to account for to HMRC under "trust tax" rules) can be reclaimed. He says it can get complicated but helpfully suggested that any tax due should be on the chargeable event certificate issued by the provider to the Trustees. He also suggested 'phoning them (HMRC) again when any CEC arrives and he will talk me through what figure to put in what box on form SA900 and how the beneficiaries can use the info I provide them on fomr R185 to complete teh R40 reclaim. What a nice man!

Thanks (0)
avatar
By leeanthonyblackshaw
09th Sep 2018 13:59

Get some proper tax and legal advice. You’re in danger of making mistakes, for which you may be personally liable, if you rely on the product provider, HMRC and forums.

Thanks (0)
avatar
By Tax Dragon
09th Sep 2018 14:55

I agree with the previous respondent. There are more issues here than you realise and you would be wise to engage someone versed in the taxation of trusts.

The news won't all be good, but it will save you making the position worse than it already is.

Thanks (0)
By Tim Vane
09th Sep 2018 15:57

LOL.

Thanks (0)