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

poseidon1

DRS1 said:

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.

I agree, this does require clarification. Certainly, the chargeable event gain ( with top slicing relief)  as described by the OP was small, so by itself should not have triggered the outcome described.

However, if the payment can be truly described as being made from trust capital rather than accumulated income , I certainly would take comfort from the trust case of  Stevenson v Wishart 1987  as set out in the article below - 

https://library.croneri.co.uk/cch_uk/wfpt/6-4#:~:text=In the past, HMRC have,the hands of the beneficiary.

 In the present situation, in reporting  trust income on supplementary form SA 107 , the return specifically identifies different forms of  Discretionary/ IIP trust income , with no reference to the possibility of trust capital distributions acquiring  the status of quasi trust income. So if this is indeed capital rather than income, it does look as if the son should not have reported it at all, which returns to my suggestion that this may have been an inadvertent problem of the trustee's making.

However, I do wonder if the trust here is indeed discretionary, why the OP does not seem to be benefiting from hands on professional tax advice on both the trust activities and the bearing that has on distributions to beneficiaries. Discretionary trusts are the most complex tier of trust arrangements and frankly require appropriate tax compliance and accounting expertise both at trust level, and (where appropriate) in assisting beneficiaries with their personal tax reporting. Certainly that was my approach when dealing with such trusts in private practice, and this trust ( if it is the correct one mentioned in the OP's 2024 post)  has been running for 25 years now.

Wirebird

sheramber said:

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?

Yes but they thought the due amount would be £3,000!

Wirebird

silvercar said:

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.

I will do the calcs so thanks but unfortunately it's a plan 1 and a plan 2 (undergrad and postgrad) which are added together; I understand there is a cap on the plan 1 but not the plan 2. I am thinking that basically, this generation really does have it bad compared to mine!! As others have queried, this is not trust income, but a chargeable event; the trust was transferred to him as sole beneficiary so there are no other funds. But this breakdown is helpful thanks.

Wirebird

poseidon1 said:

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

Different trust and no reason to be concerned

Wirebird

saajan_12 said:

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. 

yes as per a reply already, this is helpful as I will go back and recalculate, yes we did have advice but expected less charge... it is clear he owes a larger sum than expected, from all the responses, I did just want to check I was not making a massive mistake!  I think one issue is that there are 2 loans, which both seem to be separately applied....  

Wirebird

I have, on the basis of comments to my post, checked online and the issue seems that there is a cap of 15% of income, not 9%, if both an undergraduate and a postgraduate loan have been taken out, hence my son is indeed being asked for 15% of the income. If it is a one-off payment, you can ask for this to be reconsidered, apparently, though this needs to be offset against a higher interest rate if you don't pay by 31 Jan and it is then deemed you need to pay the full 15%.  Thanks everyone, it is now clear to me.

silvercar

Wirebird said:

I have, on the basis of comments to my post, checked online and the issue seems that there is a cap of 15% of income, not 9%, if both an undergraduate and a postgraduate loan have been taken out, hence my son is indeed being asked for 15% of the income. If it is a one-off payment, you can ask for this to be reconsidered, apparently, though this needs to be offset against a higher interest rate if you don't pay by 31 Jan and it is then deemed you need to pay the full 15%.  Thanks everyone, it is now clear to me.

Plan 1 is 9% of earnings over £24,990 and plan 5 is 6% on everything over £21,000. There is no cap.

poseidon1

Wirebird said:

silvercar said:

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.

I will do the calcs so thanks but unfortunately it's a plan 1 and a plan 2 (undergrad and postgrad) which are added together; I understand there is a cap on the plan 1 but not the plan 2. I am thinking that basically, this generation really does have it bad compared to mine!! As others have queried, this is not trust income, but a chargeable event; the trust was transferred to him as sole beneficiary so there are no other funds. But this breakdown is helpful thanks.

Helpful to have now established that the mention of a trust distribution was a bit of a red herring and not especially  germane to your son's predicament.

However, you indicate professional advice was taken ( I assume before the bond was encashed), and an estimate of the tax/ loan repayment arising  would only be around £3,000.

Seems to me if this was paid for advice provided in writing by the tax adviser after being supplied with all the relevant /accurate background details, and your  son then acted  to his detriment  in reliance of said advice, this should in theory be grounds for a compensation claim against the adviser concerned. Certainly, I would expect this to be the case had this been my old firm providing what transpired to be inaccurate advice in similar circumstances.

Be that as it may, you may find the following case study for 'SImon'  ( the student) of interest, relating as it does to the  advisory process that should have been undertaken on your son's behalf,  in ascertaining his student loan repayment position depending on the quantum of the expected bond gain on encashment.

https://professionalparaplanner.co.uk/technicalzone/technical-chargeable-gains-and-student-loans/

Bear in mind had the enormity of the potential liabilty been properly identified from outset, encashment of the bond could have been staggered over different tax years to mitigate/reduce his tax outcome, as indicated in the above article.

Wirebird

poseidon1 said:

Wirebird said:

silvercar said:

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.

I will do the calcs so thanks but unfortunately it's a plan 1 and a plan 2 (undergrad and postgrad) which are added together; I understand there is a cap on the plan 1 but not the plan 2. I am thinking that basically, this generation really does have it bad compared to mine!! As others have queried, this is not trust income, but a chargeable event; the trust was transferred to him as sole beneficiary so there are no other funds. But this breakdown is helpful thanks.

Helpful to have now established that the mention of a trust distribution was a bit of a red herring and not especially  germane to your son's predicament.

However, you indicate professional advice was taken ( I assume before the bond was encashed), and an estimate of the tax/ loan repayment arising  would only be around £3,000.

Seems to me if this was paid for advice provided in writing by the tax adviser after being supplied with all the relevant /accurate background details, and your  son then acted  to his detriment  in reliance of said advice, this should in theory be grounds for a compensation claim against the adviser concerned. Certainly, I would expect this to be the case had this been my old firm providing what transpired to be inaccurate advice in similar circumstances.

Be that as it may, you may find the following case study for 'SImon'  ( the student) of interest, relating as it does to the  advisory process that should have been undertaken on your son's behalf,  in ascertaining his student loan repayment position depending on the quantum of the expected bond gain on encashment.

https://professionalparaplanner.co.uk/technicalzone/technical-chargeable-gains-and-student-loans/

Bear in mind had the enormity of the potential liabilty been properly identified from outset, encashment of the bond could have been staggered over different tax years to mitigate/reduce his tax outcome, as indicated in the above article.

Amazing, this article is spot on and very helpful (though too late for us!)

silvercar

Wirebird said:

poseidon1 said:

Wirebird said:

silvercar said:

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.

I will do the calcs so thanks but unfortunately it's a plan 1 and a plan 2 (undergrad and postgrad) which are added together; I understand there is a cap on the plan 1 but not the plan 2. I am thinking that basically, this generation really does have it bad compared to mine!! As others have queried, this is not trust income, but a chargeable event; the trust was transferred to him as sole beneficiary so there are no other funds. But this breakdown is helpful thanks.

Helpful to have now established that the mention of a trust distribution was a bit of a red herring and not especially  germane to your son's predicament.

However, you indicate professional advice was taken ( I assume before the bond was encashed), and an estimate of the tax/ loan repayment arising  would only be around £3,000.

Seems to me if this was paid for advice provided in writing by the tax adviser after being supplied with all the relevant /accurate background details, and your  son then acted  to his detriment  in reliance of said advice, this should in theory be grounds for a compensation claim against the adviser concerned. Certainly, I would expect this to be the case had this been my old firm providing what transpired to be inaccurate advice in similar circumstances.

Be that as it may, you may find the following case study for 'SImon'  ( the student) of interest, relating as it does to the  advisory process that should have been undertaken on your son's behalf,  in ascertaining his student loan repayment position depending on the quantum of the expected bond gain on encashment.

https://professionalparaplanner.co.uk/technicalzone/technical-chargeable-gains-and-student-loans/

Bear in mind had the enormity of the potential liabilty been properly identified from outset, encashment of the bond could have been staggered over different tax years to mitigate/reduce his tax outcome, as indicated in the above article.

Amazing, this article is spot on and very helpful (though too late for us!)

Not too late to adjust the payment of account for next year, that should reduce the £11k by about a third.