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Tax Pool for Discretionary Trust

Have I got this right on the R185's

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I have a client with a first and final distribution from a discretionary trust.

The trust contained a property which was rented for a number of years and now has been sold.

Trust returns have been completed by another firm, and show a tax pool of (say) £20k on the rental income.

There is a capital gain of another £30k which does not (and I think correctly) appear in the tax pool.

£175k sent to 3 beneficiaries who are all non-tax payers.

Am I right that:

1. The R185 only shows the income element of the payment to the beneficiaries, not the capital distributed?  ie the CGT is not recoverable, or shown anywhere.

2. Ordinarily, you simply gross up the payment to the beneficiary by 45% to give the deemed tax paid.  I am aware this can lead to extra tax within the trust if the pool goes negative.  But as the trust has been closed, do you just ensure the tax credit = the tax pool per beneficiary?  So in practice fix the net payment line, so in this case I get 1/3 of the pool as the tax credit, and gross up the net payment accordingly?  

Very much regretting agreeing to produce the 'simple'  R185's for my long standing client.  The old trust accountant has retired.

Replies (10)

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By Tax Dragon
13th Sep 2019 15:56

Are you just doing the R185s or have you also been roped into dealing with a possible IHT return on the capital distributions? If so, and based on those numbers, you might want to look at IHTM06125 (and where that leads you) to see whether a return is needed. Hopefully you know enough about the circs to work out if the job's a good'un.

You can only completely know what is capital and what is income if there are trust accounts. No doubt it's too much to expect that these exist? And sadly I don't have a handy link that could except you from that one.

So it comes down to how 'properly' you (or maybe the trustees) think this needs to be done. Who are the trustees, by the way? They really should have taken some advice before throwing everything into the air. (I don't suppose they can even provide you with the deeds of appointment by which the monies were "sent" – and which would be useful to help you answer your question.) There's even a risk they have given themselves a personal liability – at least, in theory. And that doesn't help you in your position of impartiality.

If everyone involved is friendly and agreeable, and since in practical terms it's not going to be worth anybody's while getting this trust's affairs ship-shape, I might end up doing something along the lines you suggest, even if it wasn't optimal.

Else, in your shoes, I might see if I could extract myself from my undertaking.

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Replying to Tax Dragon:
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By The Dullard
13th Sep 2019 16:09

Tax Dragon wrote:

Else, in your shoes, I might see if I could extract myself from my undertaking.

Extract? Or extricate?

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Replying to The Dullard:
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By Tax Dragon
13th Sep 2019 16:30

https://wikidiff.com/extricate/extract

I don't like the sound of traction, so I'll accept your tracked change.

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Replying to Tax Dragon:
By ireallyshouldknowthisbut
13th Sep 2019 16:14

I am just supposedly doing the R185's and then probably the R40's for the beneficiaries who are all minors/uni persons.

There are some rudimentary trust accounts from the solicitor, but of the 'cash book' variety, but I do know how much of the distribution was the house, and how much was "other".

Trustees are lay people and the parents of the beneficiaries, one of whom is a regular client. It was a will trust from the grandparents / my client's parent originally.

Its one of those where i stupidly thought it would be a 5 minute job, and its looking horrible. If it was not a regular client I would have junked it already. i only quoted £250+VAT and spent 4 hours on it already. Doh.

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Replying to ireallyshouldknowthisbut:
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By Tax Dragon
13th Sep 2019 16:34

Talk of a Will Trust raises the risk of IHT being an issue, if still only a potential issue.

When you say it's gone to minors, do you mean to the parents as trustees for the minors?

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Replying to Tax Dragon:
By ireallyshouldknowthisbut
13th Sep 2019 16:50

im not worried about the IHT here. Figures I used above were illustrative.

I think one of the children might be just under 18, and is the child of one of the trustees. Other two are at uni so must be 18. Not sure it matters as parent was not the settlor.

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Replying to ireallyshouldknowthisbut:
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By Tax Dragon
13th Sep 2019 17:09

I was thinking more in terms of getting the overdistribution back. If, for example, you ended up deciding that the correct course of action was to treat everything but the property proceeds as income, and that led to paying extra tax within the trust if the pool's gone negative, it'd be nicer all round if the beneficiaries covered that liability (for which they'll then get credit).

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Replying to Tax Dragon:
By ireallyshouldknowthisbut
13th Sep 2019 17:16

Ah, with you. I think I am resigned to doning my cowboy hat on this one, given HMRC wont be out of pocket I cant think it really matters.

The main point of the post was really to check I wasn't going mad. On that point you agree there is no claw back on the tax on the CGT for the beneficiaries? I cant see a mechanism to get that back for them.

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Replying to ireallyshouldknowthisbut:
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By Tax Dragon
13th Sep 2019 17:22

CGT is the government's money.

So long as the grossed up rents wouldn't trigger basic rate tax - i.e. so long (but only so long) as it really is tax neutral - I think I'd yeehaw too.

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By penelope pitstop
13th Sep 2019 21:07

Trust tax is a different language.
If my former tax manager would not touch trusts then why should you?
And minimum charge for basic trust should be around £500, unless it is unusually simple.
Just a thought or two!

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