Taxable Interest on Trust Wind Up

Malthusian wrote: »

Are you sure it's a Bare trust? Income and gains from bare trusts is taxable on the beneficiary.


You refer to "top-slicing". Is the trust encashing an insurance bond?

bowlhead99 wrote: »

If it is really a *bare* trust and you have been a beneficiary of it since it was set up, then all of the interest earned within the trust has always belonged to you and not to the settlor for the 11 years that it's been running. And so you should have been paying your income tax along the way as the interest was being received inside the trust's bank account (s)... because the nature of the bare trust arrangement is that the trust's accounts are beneficially your accounts even though the trustee controls them for you.

So, if the interest has accumulated and been credited to the trust over time, if you go back and look at what was received by the trust in what year, you *may* find you are late in paying tax for some earlier years (if no tax was deducted at source by the bank or investment company or whatever generated the interest being received by the trust), but that it didn't tip you into higher rate tax for any of those years and the amount of interest you are now withdrawing from the trust in 2018/19 is not actually all current year income.

But if the £40,000 *is* all 2018/19 interest income (e.g. the trust held a ten year bank deposit product with the interest not being available to the trust until maturity which happens to be right now), then:

1) add the £40,000 to all your other income: let's just say for example that other income is £10,000 as you said you were otherwise a non tax payer close to the limit. So your total income is £50,000.

2) deduct your personal allowance of £11850 less the £1185 part of the personal allowance you give to your spouse, so that's £10665. A side note here, it doesn't make sense to give your spouse some of your personal allowance in a year where you are a 40% taxpayer, so tell HMRC you no longer want that arrangement for 2018/19. But just for example with numbers you recognise, we can work with the number of £10665. So the amount of interest income you have in excess of your reduced personal allowance is £50,000 -10,665 = £39,335.

3) The first £5000 of interest income in excess of your personal allowance is taxable at the special "starter rate for savings income" at 0%. So no tax to pay on that, leaving £34,355 of interest left over from the £39,,335 we had after step 2.

4) The normal basic rate band is £34500 wide, but we have already used up the first £5000 at the special starting rate of 0%, so there's only another £29500 of the band to go, at 20%. The £34355 after step 3 less the remaining £29500 of this basic rate band is £4855 unaccounted for.

5) You may have heard of the "personal savings allowance" that most people get towards their savings interest unless they have a super high income, it can be £1000 for basic rate taxpayers but only £500 for higher rate taxpayers. As you're going to be a high rate taxpayer your PSA is £500, tax free. So taking that off the £4855 from step 4, you have £4355 of interest income that's not covered by any allowances, starter rates or basic rate, and will be chargeable at 40%.

So, your total tax bill for the year would be £29500 at 20% (£5900) and £4355 at 40% (£1,742), about £7.6k total. Obviously replace the £40k and the £10k with the actual numbers and fix your personal allowance giveaway for this year but you can follow the above rough model.

This assumes that the (e.g.) £10k of other taxable income you have doesn't include dividend income, which when you have a lot of income would sit on top of that pile of income instead of being lost at the bottom within the persual allowance. It has a different tax rate than 40%.

Also, we're using your explanation that the £40k is just plain boring interest income and not gains on insurance bonds or other types of investments, otherwise all bets are off.