ANNEX 1:: MINOR CHANGES IN THE LAW MADE BY THE BILL This change will not alter the amount charged to tax. The most it will do is affect the timing of tax liability. In a small minority of cases this could mean a different rate of tax being applied. Any overall tax effect is likely to be negligible. Change 88: Settlements: grossing up of trustees’ expenses set against accumulated or discretionary income: section 486
This change makes it clear that trustees’ expenses are grossed up when set against the amount of income chargeable on the trustees at the trust rate or the dividend trust rate.
Trustees are chargeable under section 686(1) of ICTA at either the trust rate or the dividend trust rate on their accumulated or discretionary income. But section 686(2AA) of ICTA provides that where that income is applied in paying allowable expenses the income is charged instead at the normal rate appropriate to that income.
Since the expenses are regarded as being paid out of income after it has suffered tax at the normal rate, the amount of income arising to trustees which is applied in defraying expenses is an amount of income sufficient to meet both that tax and the expenses. In order to arrive at this amount of income, the expenses have to be grossed up at the appropriate rate. The grossing up of expenses is accepted practice although it is not clear from section 686 of ICTA itself.
In setting out how allowable expenses are taken into account, Steps 3 to 6 of section 486(1) require those expenses to be grossed up at the normal rate for the type of income concerned.