How is estate income handled when passed to a trust?

[hiriskpaul]

This must be a common situation with will trusts, but I am not sure how to handle it.

An estate I am managing has property income which has been declared on Trusts and Estates return and 20% tax paid. The property will hopefully be disposed of soon and the income into the estate will cease. When the estate is distributed to beneficiaries, I will issue each with an R185 which details the income and tax paid for their proportion of the estate. But 20% of the estate is going into a discretionary trust defined in the will and I am a trustee of this trust. How is the estate income treated in this situation? Do I issue the trust with an R185? If so, does the trust then have to declare the income and pay additional tax? Or can I ignore the income part of the settlement and treat it as trust capital?

[PinkDalek]

SECOND EDIT: WILL AMEND WHEN TIME AVAILABLE> MISTAKES MADE BELOW!]

E&OE!

Brief reply only and it can be complicated. This is my interpretation of what should be done. Broadly the residue is a mix of capital and income, thus probably the deemed income mentioned in the R185 (Estate Income) linked below. I haven't covered any other forms the Estate needs to complete as I imagine you are already aware of them from other posts of yours.

[... How is the estate income treated in this situation? Do I issue the trust with an R185? If so, does the trust then have to declare the income and pay additional tax? Or can I ignore the income part of the settlement and treat it as trust capital?

I believe you should be looking at form R185 (Estate Income) (as against form R185), which is headed Statement of income from estates for each relevant tax year:

https://assets.publishing.service.gov.u ... state_.pdf

The trustees of the discretionary trust will then need to reflect the income on Trust and Estate Tax Return(s), linked below for 2019-20:

Trust and Estate Tax Return 2020
https://assets.publishing.service.gov.u ... 0_2020.pdf

Trust and Estate Tax Return Guide 2020
https://assets.publishing.service.gov.u ... 0_2020.pdf

The discretionary trust will be liable for Income Tax at the rates shown here https://www.gov.uk/trusts-taxes/trusts-and-income-tax (noting the first £1,000 would be at 20% on the property income, such that there should be no additional tax payable on that part). The balance effectively bearing additional tax at 25% (as assessable at the trust rate of 45%).

Edit: You'll then need to become familiar with the Tax Pool for the discretionary trust ...

[PinkDalek]

SECOND EDIT: WILL AMEND WHEN TIME AVAILABLE> MISTAKES MADE BELOW!]

My apologies for the confusion caused by the above block capital late edit when I was nearly out of time to edit.

I was concerned I'd picked up the wrong R185 when referencing the form R185 (Estate Income) and may well be on the wrong track generally. I'm tempted to ask for my replies to be deleted but I'll leave them as is and hopefully someone in the know can assist further.

It commences Personal representatives (who can be either executors or administrators) may use this form to advise beneficiaries about income from the ‘residue’ (note below) of the estate of a deceased person. This applies for each year during the administration
of the estate if a ‘sum’ (note below) is paid to the beneficiary in that year and for the year in which the administration of the
estate is completed. and I assume that beneficiaries includes the discretionary trust.

What worried me and I noticed late is https://assets.publishing.service.gov.u ... state_.pdf includes:

Notes for beneficiaries

Keep this form and refer to it if making a tax return or claiming a tax repayment.
If you need to complete a tax return the box numbers on page 2 (except for box 21) match those on the SA107 ‘Trusts etc.’
pages of the tax return.

Yet SA107 is for individuals etc.

When I look at SA900 https://assets.publishing.service.gov.u ... 0_2020.pdf I can't see where such Estate Income would be included.

[scrumpyjack]

As I understand it the amounts to go on the R185 are not necessarily the income less tax paid as submitted to HMRC by the executor.
The expenses of administering the estate would be apportioned by the executor on aa appropriate basis between income and capital.
To the extent that expenses are apportioned to income, but were not tax deductible, they would be deducted from the figures on the R185. The deduction would be allocated against income starting with the income that had suffered the lowest rate of tax (ie dividends).

What fun!

[hiriskpaul]

SECOND EDIT: WILL AMEND WHEN TIME AVAILABLE> MISTAKES MADE BELOW!]

My apologies for the confusion caused by the above block capital late edit when I was nearly out of time to edit.

I was concerned I'd picked up the wrong R185 when referencing the form R185 (Estate Income) and may well be on the wrong track generally. I'm tempted to ask for my replies to be deleted but I'll leave them as is and hopefully someone in the know can assist further.

It commences Personal representatives (who can be either executors or administrators) may use this form to advise beneficiaries about income from the ‘residue’ (note below) of the estate of a deceased person. This applies for each year during the administration
of the estate if a ‘sum’ (note below) is paid to the beneficiary in that year and for the year in which the administration of the
estate is completed. and I assume that beneficiaries includes the discretionary trust.

What worried me and I noticed late is https://assets.publishing.service.gov.u ... state_.pdf includes:

Notes for beneficiaries

Keep this form and refer to it if making a tax return or claiming a tax repayment.
If you need to complete a tax return the box numbers on page 2 (except for box 21) match those on the SA107 ‘Trusts etc.’
pages of the tax return.

Yet SA107 is for individuals etc.

When I look at SA900 https://assets.publishing.service.gov.u ... 0_2020.pdf I can't see where such Estate Income would be included.

A note in the Return Guide at the bottom of page 16 says this

Where a will sets up a continuing trust, either during or at the end
of the administration period, the personal representatives will
distribute the income which arose during the administration to the
trustees of that trust. This income has been taxed in the hands of
the personal representatives. If the trustees of a discretionary or
accumulation trust have received any such income in the year,
then they enter:
• dividend type income in box 9.10
• interest and other savings type income in boxes 9.7 to 9.9
• all other income in boxes 9.17 to 9.19

So it looks as though the part of the estate income going into the trust just gets declared in the normal boxes, as though it was income generated within the trust. Or have I read this wrong?

[hiriskpaul]

As I understand it the amounts to go on the R185 are not necessarily the income less tax paid as submitted to HMRC by the executor.
The expenses of administering the estate would be apportioned by the executor on aa appropriate basis between income and capital.
To the extent that expenses are apportioned to income, but were not tax deductible, they would be deducted from the figures on the R185. The deduction would be allocated against income starting with the income that had suffered the lowest rate of tax (ie dividends).

What fun!

This expenses business is something else I have to get to grips with. What expenses are allowed against income when filling in the R185 (Estate Income) forms. Are probate fees deductible for example? I will be paying a solicitor to help with the house registration (it is currently unregistered) and disposal/appropriation of the rented property to one of the beneficiaries. Can these fees be set against income?

[scrumpyjack]

I am mot an expert on this but I guess you would have to decide for each expense to what extent it is capital or revenue in nature. So the costs of registering title I would expect to be capital and would be an addition to the cost of the property for CGT purposes (ie probate value plus registration costs). The accounting costs for the estate could be apportioned between capital and income, and so on.

[PinkDalek]

[When I look at SA900 https://assets.publishing.service.gov.u ... 0_2020.pdf I can't see where such Estate Income would be included.

A note in the Return Guide at the bottom of page 16 says this

Where a will sets up a continuing trust, either during or at the end
of the administration period, the personal representatives will
distribute the income which arose during the administration to the
trustees of that trust. This income has been taxed in the hands of
the personal representatives. If the trustees of a discretionary or
accumulation trust have received any such income in the year,
then they enter:
• dividend type income in box 9.10
• interest and other savings type income in boxes 9.7 to 9.9
• all other income in boxes 9.17 to 9.19

So it looks as though the part of the estate income going into the trust just gets declared in the normal boxes, as though it was income generated within the trust. Or have I read this wrong?

Thanks for pointing that out and providing the extracts (I should have looked deeper at the Guidance Notes, as against the SA900 itself, but was short on time).

I think you have interpreted it correctly (and my memory is now refreshed).

[hiriskpaul]

I am mot an expert on this but I guess you would have to decide for each expense to what extent it is capital or revenue in nature. So the costs of registering title I would expect to be capital and would be an addition to the cost of the property for CGT purposes (ie probate value plus registration costs). The accounting costs for the estate could be apportioned between capital and income, and so on.

Looks like you are right.

Allowable expenses: https://www.gov.uk/hmrc-internal-manual ... l/tsem7912

Not allowable: https://www.gov.uk/hmrc-internal-manual ... l/tsem7914

Essentially that means nothing is allowable as I am doing all the admin, tax forms etc. Solicitor's fees will have nothing to do with residuary income.

[hiriskpaul]

A note in the Return Guide at the bottom of page 16 says this
So it looks as though the part of the estate income going into the trust just gets declared in the normal boxes, as though it was income generated within the trust. Or have I read this wrong?

Thanks for pointing that out and providing the extracts (I should have looked deeper at the Guidance Notes, as against the SA900 itself, but was short on time).

I think you have interpreted it correctly (and my memory is now refreshed).

Thanks for pointing me in the right direction here. To summarise, an R185 (Estate Income) will be required for the trust and an SA900 will need to be filled for the tax year the income is passed to the trust, declaring the income. As you point out, that means getting to grips with Tax Pools, etc. for discretionary trusts. Yet more fun.

[PinkDalek]

To summarise, an R185 (Estate Income) will be required for the trust and an SA900 will need to be filled for the tax year the income is passed to the trust, declaring the income.

See also the following, relevant especially where the completion of the administration period is not in the same tax year as the (potentially interim, dependent on the property disposal timing etc) distribution you are considering:

Deceased persons: absolute interests in residue - liability during the administration period (1995-96 onwards)
https://www.gov.uk/hmrc-internal-manual ... l/tsem7608

As you point out, that means getting to grips with Tax Pools, etc. for discretionary trusts. Yet more fun.

Yes it is fun and has been discussed over the years both here and at TMF. Not that hard to fathom but far harder to explain in the written medium. If you'll be doing online tax returns for the trust, I believe there'll be a calculator there which one can play around with without submitting.

Alternatively, there's a link to a the HMRC tax pool calculator some way down here https://www.gov.uk/guidance/trusts-and-income-tax >>> http://www.hmrc.gov.uk/tools/trusts/index.htm. Having now glanced at the latter it shows up as "Not secure" this end and only appears to cater for Tax year for tax pool calculation up to 2017/18 so that may well be why I receive the "Not secure" warning.

Might still work though if the tax rates are still current, which I think they (currently) are viz 45%/37.5% per the guidance.