R185s

Yorkshire_Dangermouse

I have a question concerning interest included on the form R185 issued by the trustees of a will trust (IIP) to the beneficiaries.  The sole remaining asset in the trust is (now) money in the solicitors client account, and the interest thereon exceeds the £500 reporting threshold.

The solicitor has prepared the R185s, and has deducted from the interest a portion of their general legal fees charged to the trust.  I'm not comfortable with this, and have asked the solicitor to provide their rationale.  Seemingly their justification is for them preparing the R185s....but, that has nothing to do with the interest receipt.  There is a calculation to net the interest, deduct a proportion of the legal fees, and then gross up the resulting figure to disclose on the R185 as interest.

Has anyone else come across this?  My concerns are that the interest figures on the R185s won't reconcile to the interest receipts showing in the trust accounts, (or for that matter in box 9.1 of the trust tax return).  Indeed, nowhere in the guidance notes for either the R185 or the trust tax return are expenses for interest receipts mentioned. 
I've seen HelpSheet HS392, which does seem to allude to this, saying "Expenses that are incurred for the benefit of the capital beneficiaries, .....are not allowable as TMEs. They cannot be charged to income, and they cannot be apportioned."

As I say, I've asked the solicitors, but if anyone has come across this before I'd welcome your experience!

poseidon1

Yorkshire_Dangermouse said:

I have a question concerning interest included on the form R185 issued by the trustees of a will trust (IIP) to the beneficiaries.  The sole remaining asset in the trust is (now) money in the solicitors client account, and the interest thereon exceeds the £500 reporting threshold.

The solicitor has prepared the R185s, and has deducted from the interest a portion of their general legal fees charged to the trust.  I'm not comfortable with this, and have asked the solicitor to provide their rationale.  Seemingly their justification is for them preparing the R185s....but, that has nothing to do with the interest receipt.  There is a calculation to net the interest, deduct a proportion of the legal fees, and then gross up the resulting figure to disclose on the R185 as interest.

Has anyone else come across this?  My concerns are that the interest figures on the R185s won't reconcile to the interest receipts showing in the trust accounts, (or for that matter in box 9.1 of the trust tax return).  Indeed, nowhere in the guidance notes for either the R185 or the trust tax return are expenses for interest receipts mentioned. 
I've seen HelpSheet HS392, which does seem to allude to this, saying "Expenses that are incurred for the benefit of the capital beneficiaries, .....are not allowable as TMEs. They cannot be charged to income, and they cannot be apportioned."

As I say, I've asked the solicitors, but if anyone has come across this before I'd welcome your experience!

As an ex practitioner,  I can confirm this is perfectly normal and uncontentious, as long as the TMEs they calculated as the income expense is not disproportionately large in comparison to the work they have done. 

Clearly work of an income nature has been done and  it is not solely limited to preparing the R185s.

Obviously I assume  they also had to prepare the trust income tax return, report taxable income (and any gains ) and arrange payment of tax thereon as well as eventually ascertain and distribute the net income to the  IIP beneficiaries.

You indicate formal trust accounts are prepared, so I would expect to see those income expenses visible thereon.

 The HS392 help sheet does cover this issue, but perhaps in a way that was not clear to you.

I refer you to HMRC's pdf table below which is a link within the help sheet- 

https://assets.publishing.service.gov.uk/media/65f18566ff11701fff6159a8/HS392-table-2024.pdf

As you will see the first category is Accountancy and covers all the matters I indicated. The solicitors may not be accountants but they have clearly provided tax and accounting services. If you did see this table perhaps you thought only the legal fees category applied to the work performed by the solicitors?

Yorkshire_Dangermouse

poseidon1 said:

[Helpful explanation]

Many thanks for the detailed explanation.  Just one further question if I may, concerning the quote I had included from the Helpsheet HS392.  As mentioned, this is an IIP Will Trust, where the life tenant has now passed away, and the trust assets (money in the solicitors client account) is currently held pending distribution to the final beneficiaries.  Looking at the quote, I'd interpreted these final beneficiaries as 'capital beneficiaries'.   "Expenses that are incurred for the benefit of the capital beneficiaries, or for the benefit of both income and capital beneficiaries (‘the whole estate’), are not allowable as TMEs. They cannot be charged to income, and they cannot be apportioned."  I can't work out what this means, if not restricting the offset of expenses.  Thinking about this further, I see that these beneficiaries are both Income and Capital beneficiaries, in that we are entitled to both the (interest) income, and in due course the monies in the client account.  But, is that not covered by the "apportionment" restriction?

I'm the one who is preparing the trust tax return.

I realise that I'm arguing against myself to show a higher personal tax liability, but I'd like to understand this point in light of the HMRC guidance.

poseidon1

Yorkshire_Dangermouse said:

poseidon1 said:

[Helpful explanation]

Many thanks for the detailed  explanation.  Just one further question if I may, concerning the quote I had included from the Helpsheet HS392.  As mentioned, this is an IIP Will Trust, where the life tenant has now passed away, and the trust assets (money in the solicitors client account) is currently held pending distribution to the final beneficiaries.  Looking at the quote, I'd interpreted these final beneficiaries as 'capital beneficiaries'.   "Expenses that are incurred for the benefit of the capital beneficiaries, or for the benefit of both income and capital beneficiaries (‘the whole estate’), are not allowable as TMEs. They cannot be charged to income, and they cannot be apportioned."  I can't work out what this means, if not restricting the offset of expenses.  Thinking about this further, I see that these beneficiaries are both Income and Capital beneficiaries, in that we are entitled to both the (interest) income, and in due course the monies in the client account.  But, is that not covered by the "apportionment" restriction?

I'm the one who is preparing the trust tax return.

I realise that I'm arguing against myself to show a higher personal tax liability, but I'd like to understand this point in light of the HMRC guidance.

HS392 makes sense for continuing trusts, but does not quite hit the mark for situations where an IIP trust has terminated ( by virtue of death of life tenant).   Here, one considers  what is an appropriate apportionment of expenses for a terminated trust where the erstwhile capital beneficiaries ( the remainderman) now have residual income entitlements, pending the winding up of the trust which could take considerable time.

In this regard, a terminated trust can be viewed as  a quasi deceased estate, supported by the fact that  as you know the terminated trust capital is amalgamated with the IIP beneficiary's  personal assets in ascertaining overall IHT split between the two.

Because of this quasi estate nature of the terminated IIP trust, this gives rise to capital and income accounting for expenses where the professional practitioner take their cue from what is permitted for personal representatives in dealing with beneficiary's income from  deceased estates. 

Here we apply principles as outlined in HMRC tsem 7912  below

https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem7912

As you will see there is a degree of mirroring of the element of expenses that can be attributable and apportioned to trust income ( and in your case terminated trust income)  compared to those arising and attributable in the context of a deceased estate.

It is regrettable that this 'read across' is not apparent from the Helpsheet  HS392, but to be honest  it generally remains challenging for lay people to navigate and understand these archane tax matters since the entire system was designed to be interfaced by trained professionals with appropriate expertise.

 With the advent of more and more untutored lay people trying to handle these matters on a DIY basis, HMRC helpsheets, guidance and manuals can only go so far in assisting them in areas which have been intrinsically complex, made more so by virtue of periodic legislative changes. 

In summary, what these provisions are designed to do is to ensure ( as far as possible), the end beneficiary of a trust or estate  is only taxable on income they actually receive, with due allowance made for expenses properly allocated to the income.

So yes, I have to agree you are arguing to your potential  detriment in seeking to remove the  professional fees against income allocated by the solicitors in the present case. Nonetheless you are to be applauded for trying to get to grips with this issue, most would have left the entire task to a professional advisor.

Yorkshire_Dangermouse

poseidon1 said:

[More really helpful analysis]

Many thanks once again for taking the time to respond - this is why I, and many others, find such forums so useful and educational.