Dividend income received by trustees from PRs – How to return it correctly

 In Gill's Blog

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When a testator dies leaving a discretionary trust over residue, the PRs of his estate will eventually provide the trustees of the discretionary trust with the residuary income. To the extent that this is represented by dividend income on which the PRs correctly paid 7.5% income tax, then a R185 statement will be provided showing the tax deducted. How are the trustees to return this income for the relevant tax year?

The problem

There is something of a conundrum here. The current SA900 income tax form for trusts and estates has a single box (9.10) for the return of dividends from UK companies but provides no opportunity to declare the tax deducted on the dividend by the PRs.

If you use software to prepare the tax return for the trust the tax calculation will not be correct because the dividend income in the hands of the trustees is taxed at 38.1% currently and no tax credit against this for the 7.5% already paid by the PRs will be picked up by the software as there is nowhere to record it.

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The Guidance notes say:

“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 – 9.9
All other income in boxes 9.17 to 9.19”

It might look sensible to put the dividend income from the PRs in the other income boxes 9.17 – 9.19 but this will be taxed at 20% which is incorrect. And if you put it in box 9.10 you don’t get the tax credit for the 7.5% already paid by the PRs.

Some solutions until the form is corrected

Some practitioners have come up with workarounds, the results of which may vary depending on the software you are using. All the following depend on you also entering an explanation in the white space at the end of the form, so the problem is drawn to the attention of HMRC:

  1. Enter the ‘gross’ dividend in box 9.10 and then enter the tax deduction in box 9.8 – even though you have nothing in boxes 9.7 and 9.9 some versions of software accept this and provide a correct tax calculation as a result.
  2. Enter the dividend in box 9.1 and explain the problem in the white space at the end of the form – the only problem with this is that it requires a manual alteration by HMRC.
  3. Enter the ‘gross’ dividend in box 9.1 and put the tax paid in the box for tax overpaid in a previous year (box 17.4) with a white space explanation. Doing this the software will provide a correct calculation.

Let’s hope HMRC manage to update the form for 2022/23!

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