tiny salary but lump sum for a house deposit means SLC want half son's salary's worth this year

Wirebird

My son is struggling on an entry level teacher's salary. He has a small amount deducted each month for student undergraduate and postgraduate loans as just over the thresholds. As a trust beneficiary he received £70,000 from a trust in the tax year 2024-5 for a house deposit, which he then used to buy a tiny 1-bed place with a mortgage as this was cheaper than renting. With top-slicing covering 18 years, this had a tiny tax liability. He has almost no spare money to live (and is having counselling for this). Just doing his self-assessment tax return online, which he had to do because of the lump sum, it comes up that because of the £70,000 he owes almost £11,000 in SLC fees for the year which are due 31 Jan.  I read that for SLC, buying a house is no 'excuse' for using liquid assets up, but how can someone with a £22,000 salary and money in his pocket of about £100 a month once outgoings like the mortgage are paid then have to fork out such an amount because of the one-off payment that is now tied up in his house? What can he do? What is the best? I don't even understand standovers - these seem to be short term and no answer for someone like him. If he writes on the tax form that he has no spare money for this, and doesn't tick the SLC box, so that the calculation is not automatic, and then has to pay interest on a late payment, how does that work? (I feel he is coerced into borrowing the money in the same way that private parking ticket companies put the fear of god into people). thanks

Dazed_and_C0nfused

Wirebird said:

My son is struggling on an entry level teacher's salary. He has a small amount deducted each month for student undergraduate and postgraduate loans as just over the thresholds. As a trust beneficiary he received £70,000 from a trust in the tax year 2024-5 for a house deposit, which he then used to buy a tiny 1-bed place with a mortgage as this was cheaper than renting. With top-slicing covering 18 years, this had a tiny tax liability. He has almost no spare money to live (and is having counselling for this). Just doing his self-assessment tax return online, which he had to do because of the lump sum, it comes up that because of the £70,000 he owes almost £11,000 in SLC fees for the year which are due 31 Jan.  I read that for SLC, buying a house is no 'excuse' for using liquid assets up, but how can someone with a £22,000 salary and money in his pocket of about £100 a month once outgoings like the mortgage are paid then have to fork out such an amount because of the one-off payment that is now tied up in his house? What can he do? What is the best? I don't even understand standovers - these seem to be short term and no answer for someone like him. If he writes on the tax form that he has no spare money for this, and doesn't tick the SLC box, so that the calculation is not automatic, and then has to pay interest on a late payment, how does that work? (I feel he is coerced into borrowing the money in the same way that private parking ticket companies put the fear of god into people). thanks

Are you quite sure the return has been correctly completed?

silvercar

I'd suggest you post your query on the student board here: https://forums.moneysavingexpert.com/categories/student-money-saving

Not all income is subject to deductions for student loan repayments, so it may be that this trust income is not included. I don't know exactly how it works in special situations like this.

If it is to be considered as income, then he should have kept 9% aside for student loan repayments, easy to say in hindsight I appreciate.

sheramber

Wirebird said:

My son is struggling on an entry level teacher's salary. He has a small amount deducted each month for student undergraduate and postgraduate loans as just over the thresholds. As a trust beneficiary he received £70,000 from a trust in the tax year 2024-5 for a house deposit, which he then used to buy a tiny 1-bed place with a mortgage as this was cheaper than renting. With top-slicing covering 18 years, this had a tiny tax liability. He has almost no spare money to live (and is having counselling for this). Just doing his self-assessment tax return online, which he had to do because of the lump sum, it comes up that because of the £70,000 he owes almost £11,000 in SLC fees for the year which are due 31 Jan.  I read that for SLC, buying a house is no 'excuse' for using liquid assets up, but how can someone with a £22,000 salary and money in his pocket of about £100 a month once outgoings like the mortgage are paid then have to fork out such an amount because of the one-off payment that is now tied up in his house? What can he do? What is the best? I don't even understand standovers - these seem to be short term and no answer for someone like him. If he writes on the tax form that he has no spare money for this, and doesn't tick the SLC box, so that the calculation is not automatic, and then has to pay interest on a late payment, how does that work? (I feel he is coerced into borrowing the money in the same way that private parking ticket companies put the fear of god into people). thanks

Did he seek any advice about how the trust income would affect his tax position and his student loan repayments, before buying his house?

mybestattempt

Wirebird said:

My son is struggling on an entry level teacher's salary. He has a small amount deducted each month for student undergraduate and postgraduate loans as just over the thresholds. As a trust beneficiary he received £70,000 from a trust in the tax year 2024-5 for a house deposit, which he then used to buy a tiny 1-bed place with a mortgage as this was cheaper than renting. With top-slicing covering 18 years, this had a tiny tax liability. He has almost no spare money to live (and is having counselling for this). Just doing his self-assessment tax return online, which he had to do because of the lump sum, it comes up that because of the £70,000 he owes almost £11,000 in SLC fees for the year which are due 31 Jan.  I read that for SLC, buying a house is no 'excuse' for using liquid assets up, but how can someone with a £22,000 salary and money in his pocket of about £100 a month once outgoings like the mortgage are paid then have to fork out such an amount because of the one-off payment that is now tied up in his house? What can he do? What is the best? I don't even understand standovers - these seem to be short term and no answer for someone like him. If he writes on the tax form that he has no spare money for this, and doesn't tick the SLC box, so that the calculation is not automatic, and then has to pay interest on a late payment, how does that work? (I feel he is coerced into borrowing the money in the same way that private parking ticket companies put the fear of god into people). thanks

Assuming the trust income of £70k is correct then as unearned income it is taken into account to calculate student loan repayments:

https://www.gov.uk/hmrc-internal-manuals/collection-of-student-loans-manual/cslm16035

Are you sure the almost £11k due on 31 January 2026 doesn't include a payment on account for 2025/26 which could be reduced if his income for 2025/26 will not include any unearned trust income.

https://www.gov.uk/guidance/claim-to-reduce-payments-on-account

Even if a payment on account can be eliminated clearly a substantial amount is due to be paid by 31January 2026 so your son should ask HMRC for a payment plan before then:

https://www.gov.uk/difficulties-paying-hmrc/pay-in-instalments

silvercar

I'm making some assumptions here, correct if wrong. Is your son in England? and as an entry level teacher I'm thinking a recent graduate, so probably a plan 2 loan. The threshold for repayment in 2024-25 was £27,295. So he would pay 9% of anything above that. So if his only income is a £22,000 salary his total slc repayment would be £5,823.45. Even if he had other income and so had reached the threshold, the £70k trust fund could only give a max repayment of 9% of that, so £6,300. 

If he has a bill of £11k, that does suggest, either he has unpaid student deductions or there is a payment of account included. This is usually half the expected payment due for the following year, so that would be a max of £3,150 giving £8,973.45. 

It may well be that the £11k quoted includes some income tax on the trust fund payment that hmrc are assuming will be annual income, so again includes a payment on account for the 2025-26 year. There is a box on the self assessment form that you can reduce a payment on account if you don't expect such high income next year. Then put an explanation in the 'notes' box as to why you have made the adjustment.

If the payment on account is included in the £11k, it suggests the tax for the 2024-25 year is around the £7,333 mark. One option would be to ask the trust fund to release more money to be able to pay this bill. Particularly as arguably if needing a £70k house deposit, he should have requested enough from the fund to pay the deposit AND any tax due on it.

poseidon1

Wirebird said:

My son is struggling on an entry level teacher's salary. He has a small amount deducted each month for student undergraduate and postgraduate loans as just over the thresholds. As a trust beneficiary he received £70,000 from a trust in the tax year 2024-5 for a house deposit, which he then used to buy a tiny 1-bed place with a mortgage as this was cheaper than renting. With top-slicing covering 18 years, this had a tiny tax liability. He has almost no spare money to live (and is having counselling for this). Just doing his self-assessment tax return online, which he had to do because of the lump sum, it comes up that because of the £70,000 he owes almost £11,000 in SLC fees for the year which are due 31 Jan.  I read that for SLC, buying a house is no 'excuse' for using liquid assets up, but how can someone with a £22,000 salary and money in his pocket of about £100 a month once outgoings like the mortgage are paid then have to fork out such an amount because of the one-off payment that is now tied up in his house? What can he do? What is the best? I don't even understand standovers - these seem to be short term and no answer for someone like him. If he writes on the tax form that he has no spare money for this, and doesn't tick the SLC box, so that the calculation is not automatic, and then has to pay interest on a late payment, how does that work? (I feel he is coerced into borrowing the money in the same way that private parking ticket companies put the fear of god into people). thanks

Are you and your son certain the £70k amount was trust income?

 If so it would have been accompanied with a trust tax deduction certificate R185 showing tax deducted at possibly 45%, 20% or 8.75% depending on the type of trust ( discretionary or income in possession), and grossed up accordingly. The tax amount/s should have been available as a credit against his personal tax liabilities. So what was the tax credit shown on the distribution, and what was the grossed up figure your son entered on his tax return in respect of the £70k net of tax amount?

Unless the trust itself was very large and/ or had a significant amount of undistributed income from past years, £70k is large amount to solely  represent trust income to a single trust beneficiary.

If an accountancy firm had been involved with the administration of the trust, it would be usual to consider and advise on the tax consequences on the beneficiary of such a substantial income distribution if indeed it represented trust income as opposed to trust capital. Was there no trustee  consultation with your son prior to the distribution being made?

Finally, is the trust the same as the entity you mentioned in the thread below? If so I see (with some concern) you were a trustee of that arrangement. I also see it was created in 2001, but you do not mention whether it is discretionary or interest in possession- 
.
https://forums.moneysavingexpert.com/discussion/6533942/finding-an-advisor-to-help-me-use-trust-money-without-bringing-it-back-into-estate#latest

DRS1

There is a reference to top slicing.  So isn't there some deeming going on here - ie a chargeable event has triggered an income tax liability even though the money is not income in the traditional sense of being dividends or interest payments.

saajan_12

Wirebird said:

... it comes up that because of the £70,000 he owes almost £11,000 in SLC fees for the year which are due 31 Jan.  I read that for SLC, buying a house is no 'excuse' for using liquid assets up, but how can someone with a £22,000 salary and money in his pocket of about £100 a month once outgoings like the mortgage are paid then have to fork out such an amount because of the one-off payment that is now tied up in his house? What can he do? What is the best? I don't even understand standovers - these seem to be short term and no answer for someone like him. If he writes on the tax form that he has no spare money for this, and doesn't tick the SLC box, so that the calculation is not automatic, and then has to pay interest on a late payment, how does that work? (I feel he is coerced into borrowing the money in the same way that private parking ticket companies put the fear of god into people). thanks

Treating it as 50% of a salary is unnecessarily alarmist, the bill is clearly not arising from the salary and of course no one is saying that would be reasonable. 

The question is
* whether the trust setup means the money would be treated as income for tax and SLC purposes
* whether the 11k is correct on that basis (usually 9% which is much less than 11k)

If an SLC repayment is due then this should have been budgeted at the time before buying the house. If son didn't do that and is now having to pay it out of salary / borrowings, that's not inhererently anyone else's fault. However it may not acutally be due in that amount so do check the above. 

poseidon1

DRS1 said:

There is a reference to top slicing.  So isn't there some deeming going on here - ie a chargeable event has triggered an income tax liability even though the money is not income in the traditional sense of being dividends or interest payments.

Top slicing relief is irrelevant here, unless the trust distribution to the son was in the form of an assignment of an investment bond in specie to him by the trustees, which he then went on to encash as beneficial owner triggering a chargeable event gain in his own name.  If this is what happened, the assignment would ordinarily be treated and documented as a capital distribution from a trust ( not income).

The OP needs to confirm whether this is how the £70k so called trust income distrbution was structured, since if the bond was actually encashed in the trust and those proceeds distributed to the son, top slicing does not apply ( trusts do not benefit from top slicing on realised bond gains). Worse still,  any investment bond income tax payable at trust level at the 45% rate, is not available as a tax credit to pass on to a beneficiary in receipt of the resulting cash.

The OP needs to answer the question as to whether the trust she is referring to is the one she administers as trustee , whether the trust is discretionary, clarify the nature of the trusts assets and exactly how the trust distribution to the son was structured.  Investment bonds held in trust are complex in terms of tax treatment, even more so if the underlying trust is discretionary.

There is important background information missing from the OP's post, and if this current situation does arise from the trust she administers  then as trustee she may have been the unwitting architect of her son's present misfortune. 

On a more positive note, if the core trust assets are/were investment bonds, the £70k distribution may have been wrongly characterised as trust income since investment bonds do not generate distributable trust income, despite the gains therefrom being liable to income tax. Investment bonds purchased with trust capital, retain their identity as capital investments. With more information supplied by the OP, this may be a situation where the son maybe entitled to submit a corrective tax return by reason of his distribution having been incorrectly identified as trust income.

DRS1

It is notable that the OP does not say the £70k was trust INCOME only that as a beneficiary he received £70k from a trust.  So it could be capital appointed out to him?  I know: more information needed.

The OP also refers to the tax liability being small "With top-slicing covering 18 years".  So presumably what you suggest could be the way it happened: bond appointed out to him in specie and he encashes it.  18 years doesn't quite tie up with 2001 but maybe it was a later investment or a different trust.

I think the question would be whether if there is a chargeable event then does the student loan repayment bite on that because it is treated as income.  So even if the trust distribution is treated as a capital distribution the subsequent encashment could be what triggers the liability to repay the loan.