Tolley® Exam Training TRUSTS AND ESTATES CHAPTER 4

CHAPTER 4

INCOME TAX ON “MIXED” TRUSTS

In this chapter you will learn about “mixed” trusts and in particular:
– what is a “mixed” trust
– how to calculate the income tax liability of a “mixed” trust
– the tax position of the beneficiaries
– the implications of a beneficiary attaining an interest in possession during the tax year

4.1 What is a “Mixed” Trust?

A “mixed” trust is a trust in which:

• One or more beneficiaries has a right to part of the income of a trust; and

• The remainder of the trust income can be accumulated and/or distributed at

the discretion of the Trustees.

The trust is effectively a “hybrid” between an interest in possession trust and a

discretionary trust.

4.2 The Income Tax Treatment

In a mixed trust:

• The income subject to an interest in possession which cannot be accumulated

within the trust is subject to tax using the IIP rules; and

• Income which can be accumulated or distributed at the discretion of the

Trustees is liable to tax at the rates applicable to trusts.

There are no separate income tax rules for mixed trusts.

Income subject to an interest in possession is taxed at the basic rate (20%) and
dividend ordinary rate (7.5%) only.

Income which can be accumulated and/or distributed at the discretion of the

Trustees is taxable at the rates applicable to trusts.

Expenses can be deducted when calculating income which is taxable at the rates
applicable to trusts. Unless the expenses specifically relate to the “discretionary”
part of the trust fund, expenses must be apportioned in the same way as income.

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Tolley® Exam Training TRUSTS AND ESTATES CHAPTER 4

 Illustration 1

The Abbey Family Trust has 3 beneficiaries, John, Paul and George. John is 23, Paul
is 19 and George is 17.

The terms of the trust are that each beneficiary becomes entitled to a one-third
share of trust income from the age of 21 and to one-third of the trust capital at
age 30. Until a beneficiary reaches the age of 21, trust income can be
accumulated or distributed at the discretion of the Trustees.

The trust income and expenses for 2018/19 are as follows:

£
Rental profits 48,000
Bank interest 15,000
UK dividends 6,000

Trust management expenses (1,110)

Calculate the income tax payable by the Trustees for 2018/19.

Solution

The trust is a mixed trust because one of the beneficiaries (John) is over 21 and
therefore has an interest in possession in one-third of the fund. The other two
beneficiaries have not yet attained 21 and the remaining income can be paid or
accumulated at the Trustees’ discretion.

The income tax computation for 2018/19 is as follows:

Non- Interest Dividends

savings
£ £ £
Rental profits 48,000
Bank interest 15,000
UK dividends 6,000
Less: income subject to IIP (1/3) (16,000) (5,000) (2,000)
Income from discretionary fund 32,000 10,000 4,000
Less: expenses (£1,110 × 100/92.5 × _____ _____ (800)
2/3)
Income liable at rates applicable to 32,000 10,000 3,200
trusts

Tax
£1,000 @ 20% 200
£(31,000 + 10,000) @ 45% 18,450
£3,200 @ 38.1% 1,219
£800 @ 7.5% 60
19,929
Add tax on income subject to IIP:
£(16,000 + 5,000) @ 20% 4,200
£2,000 @ 7.5% 150
4,350
Total tax payable 24,279

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Tolley® Exam Training TRUSTS AND ESTATES CHAPTER 4

4.3 Tax Position of Beneficiaries

In the above illustration, John is over the age of 21 and is therefore entitled to one-
third of the annual trust income, after income tax and a proportion of the trust
expenses have been deducted. This net trust income will flow through to John.

The amount distributable to John will be certified by the Trustees on the tax
deduction certificate R185 as follows:

John:

Non- Interest Dividends

savings
£ £ £
Gross income subject to IIP (1/3) 16,000 5,000 2,000
Less: tax paid by Trustees @ 20% / (3,200) (1,000) (150)
7.5%
Net income 12,800 4,000 1,850
Less: expenses (£1,110 × 1/3) _____ _____ (370)
Income distributable to John 12,800 4,000 1,480

R185: Net Tax

£ £
Non-savings 12,800 3,200
Interest 4,000 1,000
Dividends 1,480 120
18,280

The interest and dividend income will be eligible for the Personal Savings
Allowance and Dividend Allowance.

Paul and George are under the age of 21 and therefore have no entitlement to
trust income.

Any income distributions made to them will be at the discretion of the Trustees.
Such distributions will be treated as made net of a 45% tax deduction at source
with the net amount (and the associated tax credit) being certified to them on
form R185.

The gross trust income will be taxed as non-savings income. There is no “look
through” to the underlying source as there is for income subject to an interest in
possession.

The Trustees must maintain a tax pool in respect of income within the
“discretionary” part of the trust.

4.4 Beneficiary Attaining an IIP During the Tax Year

If a beneficiary of a mixed trust becomes entitled to an interest in possession part

way through the tax year, the trust income must be allocated to either the period
before or the period after the IIP was attained.

In the case of interest and dividend income, income is allocated to the period in
which the income was physically received.

Rental profits are time apportioned.

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Tolley® Exam Training TRUSTS AND ESTATES CHAPTER 4

Expenses are allocated to the period to which they relate. Where an expense
relates to the whole of the tax year (for example, accountancy fees for preparing
accounts or tax returns), the expense can be time apportioned. This will be the
case for most trust management expenses.

For mixed trusts with a large number of beneficiaries, this is an important practical
issue as it is common for at least one beneficiary to become entitled to income
part way through the tax year.

 Illustration 2

Sean and Daniel are the two beneficiaries of the Fleming Family Trust. The terms of
the trust are that each beneficiary becomes entitled to a 50% share of trust
income from the age of 25. Until a beneficiary reaches the age of 25, trust income
can be accumulated or distributed at the discretion of the Trustees.

The trust income and expenses for 2018/19 are as follows:

£
Rental profits 24,000
Bank interest 4,000
UK dividend 10,000

Trust management expenses (925)

The bank interest is credited to the trust bank account annually on 31 December
each year.

The dividend was paid in respect of shares in Fleming Publications Ltd and was
received on 30 June 2018.

Sean was 25 on 6 July 2018. Daniel is 22.

Calculate the Trustees income tax payable for 2018/19.

Solution

Sean attained an IIP during the year and will therefore be entitled to 50% of the
net trust income with effect from 6 July 2018.

The trust income to which Sean is entitled in 2018/19 is as follows:

£
Rental profits 50% × (£24,000 × 9/12) 9,000
Bank interest (received 31.12.18) 50% × £4,000 2,000
UK dividend (received 30.6.18) Nil

Trust management expenses 50% × (£925 × 9/12) (347)

Daniel does not yet have an interest in possession so the remainder of the trust
income is taxable at the discretionary rates.

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Tolley® Exam Training TRUSTS AND ESTATES CHAPTER 4

The income tax payable by the Trustees for 2018/19 is as follows:

Non- Interest Dividends

savings
£ £ £
Rental profits 24,000
Bank interest 4,000
UK dividends 10,000
Less: income subject to IIP (see above) (9,000) (2,000) (Nil)
Income from discretionary fund 15,000 2,000 10,000
Less: expenses (925 - 347) × 100/92.5 ______ _____ (625)
Income liable at rates applicable to trusts 15,000 2,000 9,375

Tax

£1,000 @ 20% 200

£(14,000 + 2,000) @ 45% 7,200
£9,375 @ 38.1% 3,572
£625 @ 7.5% 47
11,019
Add tax on income subject to IIP: 2,200
£(9,000 + 2,000) @ 20%
Total tax payable 13,219

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Tolley® Exam Training TRUSTS AND ESTATES CHAPTER 4

EXAMPLES

 Example 1

The Alphabet Family Trust has two beneficiaries, Yvonne and Zoe. The trust gives
the beneficiaries a right to income at age 18 and capital at age 21. The Trust’s
only income producing asset is shares in Alphabet Trading Ltd. Yvonne is 19. Zoe is
16.

The trust income and expenses for 2018/19 are as follows:

£
Dividends 20,000
Trust management expenses (370)

Calculate the Trustees income tax payable for 2018/19.

 Example 2

The Alphabet Family Trust (see above) made income distributions of £6,000 each
to Yvonne and Zoe in the tax year 2018/19. The tax pool at 6 April 2018 stood at
£1,000.

Show the tax pool to be carried forward at 5 April 2019.

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Tolley® Exam Training TRUSTS AND ESTATES CHAPTER 4

ANSWERS

 Answer 1

The trust is a mixed trust because one of the beneficiaries (Yvonne) is over 18 and
therefore has an interest in possession in 50% of the fund. Zoe has not yet attained
18 and the remaining income can be paid or accumulated at the Trustees’
discretion.

The income tax computation for 2018/19 is as follows:

Dividends
£
Dividends 20,000
Less: income subject to IIP (50%) (10,000)
Income from discretionary fund 10,000
Less: expenses (£370 × 100/92.5 × 50%) (200)
Income liable at rates applicable to trusts 9,800

Tax
£1,000 @ 7.5% 75
£(9,800 – 1,000) = £8,800 @ 38.1% 3,353
£200 @ 7.5% 15
3,443
Add tax on income subject to IIP: £10,000 @ 7.5% 750
Total tax payable 4,193

 Answer 2

Yvonne has an IIP so any distributions to her do not affect the tax pool.

£
B/fwd at 6 April 2018 1,000
Add: Tax on Income from discretionary fund
£1,000 @ 7.5% 75
£8,800 @ 38.1% 3,353
4,428
Less: credits claimed by discretionary beneficiaries (£6,000 x (4,909)
45/55)
Overdrawn pool / Trustees’ liability (481)

C/fwd at 6 April 2019 Nil

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Tolley® Exam Training TRUSTS AND ESTATES CHAPTER 4

INCOME TAX ON “MIXED” TRUSTS

A “mixed” trust is a cross between an interest in possession trust and a discretionary trust.

Income which is subject to an IIP is taxed at the basic rate and the dividend ordinary rate
only.

Income which can be accumulated within the trust or paid at the Trustees’ discretion is
liable to tax at the rates applicable to trusts (38.1% for dividends and 45% for other
income).

Expenses are apportioned between the IIP and discretionary parts of the trust.

If a beneficiary becomes entitled to income part way through the tax year, trust income
for the year must be allocated to the periods either before or after the IIP arises. Interest
and dividends are allocated according to the date of receipt. Rental income (and trust
expenses) can be time apportioned.

© RELX (UK) Limited 2018 44 FA 2018