How should the trustees of a settlor-interested trust deal with the necessary paperwork in order to comply with HMRC’s requirements? Terry Jordan considers this for Taxation magazine’s Readers’ Forum.
There is uncertainty as to whether a form R185 (Trust Income) or a form R185 (Settlor) should be issued when a settlor is the beneficiary of an interest in possession trust.
Our client is the settlor and life tenant of an interest in possession trust. I understand that ITTOIA 2005, s 624 does not apply to the income he receives because there is no need to apply a deeming provision.
In this situation I would expect the trustees to provide him with a form R185 (Trust Income) rather than R185 (Settlor). The effect would be to reduce his income by any trust management expenses (TMEs) properly charged against income.
However, this is at odds with the HMRC guidance in Helpsheet 270. This suggests that an R185 (Settlor) should be used and “this amount may be more than the income to which you are entitled under the deed as they may have used some of that income on expenses incurred in managing the trust”.
Of course, the deemed income would not be reduced by any TMEs.
I appreciate that certain sums are treated as income for tax purposes. As a matter of trust law, these are capital receipts (eg short-lease premiums, share buy-backs etc) and are therefore chargeable under s 624 (presumably reported to the settlor beneficiary on an R185 (Settlor)).
Do readers consider that the HMRC guidance is incorrect? Has anyone experienced trustees issuing both forms R185 (Trust Income) and R185 (Settlor) to the life tenant or is the distinction glossed over in practice?
Query 18,370– Trustee
Reply from Terry “Lacuna” Jordan, BKL
Trustee believes that his client, who is the settlor and life tenant of an interest in possession trust, is outside the scope of ITTOIA 2005, s 624. Apparently, this is on the basis that, as a matter of fact, he is in receipt of the income.
This is a novel approach, but not one with which HMRC would be likely to agree, nor does it accord with the legislation.
Page 3 of Helpsheet 270 states:
“If you are a settlor of a trust and also a beneficiary with an absolute entitlement to income of that trust (but not capital), the trust is settlor-interested. The trustees may have given you form R185 (Settlor) with details of the income on which you are taxable as settlor. This amount may be more than the income to which you are entitled under the deed as they may have used some of that income on expenses incurred in managing the trust. As settlor you are taxable on the total income. Do not show your entitlement in boxes 3 to 5 of the Trusts etc pages. Instead include the total income arising to the trustees in boxes 7 to 9. If you have not been given a form R185 (Settlor), you may need to speak to the trustees to find out the amount of income taxable on you.”
Accordingly, the relevant form for completion by the trustees is R185 (Settlor) and not R185 (Trust Income). Before 6 April 2006, the trustees would have had no reporting obligation; the income would have been disclosed only on the settlor’s self-assessment return.
Since that date, trustees are obliged to account for tax for which the settlor receives credit. If the settlor obtains a repayment of tax he is obliged to return it to the trustees.