Tax Pool for a discretionary Trust - HMRC's Tax Pool Calculator figures don't stack up

Carlo234 · 18 June 2020 at 7:41PM

Hi All. I realise this isn't a perfect "fit" in the "Cutting Tax" category, however it doesn't appear to fit anywhere else either. However, a Discretionary Trust is a pretty useful way of cutting Tax, so the readers of this section might find it useful. I'm trying to understand this better, but am struggling with a particular aspect of Tax Pools, where the tax-man appears to have stacked the chips in his favour !!! I think this may be an example of a simple question where the answer is not quite so simple.
As a Trustee of my father's Discretionary Will Trust, I'm ok with the basic concept of the Tax Pool, but don't understand this particular aspect: Using HMRC's Discretionary Trust Tax Pool Calculator, I entered the following:Tax Year 17-18, No of Trusts = 1, Other Trust Income (available for discretionary distribution): £100, Net Payments made to Beneficiaries : £24.45. The response from the calculator is: “Tax Pool available before Payments to beneficiaries : £20, Tax Pool surplus/shortfall (after making the distribution of £24.45) = £0"

As trustee, from this I understand that I may only distribute £24.45 of the income to the beneficiaries, and the amount of tax that I as trustee will pay on the £100 is at most £45.

So from the £100 of income if we subtract the distribution of £24.45, and the maximum (albeit unlikely) tax paid of £45, it leaves £30.55.

What do I do with this remaining £30.55 of income? Can I distribute it without an accompanying tax credit?

And what's HMRC's reasoning in allowing only £24.45 to be made available for distribution from £100 of income?

Jeremy535897 · 18 June 2020 at 10:08PM

It's not something I have looked at in the last thirty years (and the rules have changed many times since then), but I think what it is saying is that the trust has received gross income of £100, and the trustees have paid the standard rate of tax of 20% on it, probably because the trust income is £1,000 or less. Thus the tax pool is £20. Any distribution of income to a beneficiary carries a 45% tax credit, so a net distribution of £24.45 (55%) carries a tax credit of £20 (45%). That has used up all the tax the trustees have paid. Any further income distribution results in a shortfall.