ANNEX 1:: MINOR CHANGES IN THE LAW MADE BY THE BILL This change is in taxpayers’ favour in principle and may benefit some in practice. But the numbers affected and the amounts involved are likely to be small.
Change 87: Settlements: trustees’ expenses set against accumulated or discretionary income when incurred: sections 484 and 485 and Schedule 2Part 10 (trustees’ expenses to be set against trustees’ trust rate income)
This change alters the way that trustees’ expenses are taken into account in measuring the trustees’ liability on income liable at the dividend trust rate or at the trust rate, so that this is done by reference to when the expenses are incurred rather than when they are paid. It also introduces explicit rules about the relief available where the expenses exceed such income.
Accumulation or discretionary income, and certain other receipts of trustees, are liable to income tax at either the trust rate or the dividend trust rate. Section 686(2AA) of ICTA provides that where this “trust rate income” is applied in defraying allowable expenses the income is charged instead at the normal rate appropriate to the income concerned. The word “defraying” is considered to require that the expense must have been paid before it is taken into account.
For settlements in which a beneficiary has an interest in possession, expenses are taken into account when they are incurred (see section 500(1) of this Act). This difference can give rise to practical difficulty, eg in relation to settlements that have both types of beneficiary. This change removes the difference, so that the rule in section 484 also uses the “incurred” basis.
Section 485 introduces explicit rules about the relief available where the trustees’ expenses exceed the trustees’ trust rate income in the tax year concerned. That section also operates by reference to when the expenses are incurred (contrary to present practice). The rule is that excess expenses are carried forward and relief is given as soon as there is sufficient income available.
In general, expenses are not paid before they are incurred. This timing effect will normally be in trustees’ favour.