We set out below a difference of opinion upon the principle of tax calculation and readers' views are sought.
The income of a trust for the year ended 5 April 2000 is:
Income from property | £2,011 |
Interest received | £799 |
We set out below a difference of opinion upon the principle of tax calculation and readers' views are sought.
The income of a trust for the year ended 5 April 2000 is:
Income from property | £2,011 |
Interest received | £799 |
Trading loss | (£2,457) |
Dividend income | Nil |
50 per cent of the income is chargeable at 34 per cent, one beneficiary being a minor. The remainder is not subject to additional rate tax.
We consider that the loss relief may be set primarily against the Schedule A income, with the balance of £446 being set against the bank interest. This leaves £353 of bank interest chargeable at 20 per cent and one half of it liable at a further 14 per cent.
The Revenue's computer refuses to accept this calculation and insists that £353 is fully chargeable at the rate applicable to trusts. A final bizarre twist is that it insists that the appropriate rate is the Schedule F trust rate.
The Inspector agrees the computer's calculation. We cannot see where we are going wrong and would be grateful for readers' advice.
(Query T15,782) – Woldul.
The 'computer' is clearly wrong, if only because the Schedule F rate cannot possibly apply to any of the income of the trust fund: see section 686(1AA)(a), Taxes Act 1988.
With regard to the pairing of the losses, one has to resort to the general law. In relation to English trusts where there was an entitlement to income (as seems to exist in relation to half the fund), the position was laid down by the House of Lords in two cases, Williams v Singer 7 TC 387, and Archer-Shee v Baker 11 TC 749.
The underlying rule is that each item of income is that of the beneficiary, rather than of the trustees. Half of each of the Schedule A and interest therefore 'belongs' to the beneficiary of full age.
Those cases did not address the issue of trustees' trading losses. On general principle, however, these cannot, as a matter of trust law, be set wholly against the accumulation and maintenance half. It follows that half of them must abate the sources of income of the beneficiary of full age. This gives the result 'Woldul' is contending for.
However, even if (in defiance of all logic) I am wrong in this respect, and the losses have to be set wholly against the accumulation and maintenance half, the result for which the Inspector is contending cannot be reached because the effect of the House of Lords' cases would be to eliminate the accumulation and maintenance fund's taxable income!
This seems to be yet another case where the computer programs and internal manuals have been found wanting. – WJdeS.
From the information given, I can understand why the wrong result is being produced. 'Woldul' appears to assume that both the Revenue computer and the Inspector will automatically treat half the income as being not subject to the additional rate. However, this is not the case. One must claim a deduction for the amount not subject to trustee discretion. In the 2000 tax return, one needs to tick Yes to question 13 and fill in £177 (i.e. half of £353) in box 13.9 (amounts chargeable at the lower rate not subject to trustees' discretion). This should achieve the desired result. – Zippy.