What is The Trustee’s Tax Pool? And How to Calculate the Tax

We heard that tax pools were part of the most recent AF1 paper, which might have been a surprise for some. We wondered quite how many students would have known enough to answer the question or indeed how much anyone knew about them! This article is helpful to those studying for their CII AF1, AF5, J02 and R03 exams. 

This article is relevant to examinable tax year 2017/18.

Discretionary Trusts

The first thing to say is that tax pools apply to trustees of discretionary trusts. Discretionary trusts are where trustees use their discretion to make income and capital payments; they can decide what gets paid out and to whom. No beneficiary has a right to anything.

How much tax?

Trustees have to pay tax on income they receive. They have a standard rate band of £1,000, which means that dividend income up to £1,000 is taxed at 7.5%, and if it was any other type of income, it would be taxed at 20%. (Remember also that trustees don’t get a dividend allowance). Above the £1,000, dividends are taxed at 38.1%, and all other income is taxed at 45%. The standard rate band has be divided by the number of trusts the settlor has set up, but there is a standard rate band for each trust of £200 if they have set up more than five.

As you will know, when trustees use their discretion to make an income payment, it has to be made with a tax credit of 45%. The beneficiary then either claims back some of the tax paid or all of it if they are a non-taxpayer (or none of it if they are an additional rate taxpayer).

This tax credit (basically income tax that is treated as having been deducted) needs to have been covered by tax already paid by the trustees. After all, HMRC needs to make sure that any tax reclaim being made by a beneficiary is not more than the amount of tax originally paid by the trustees.

What is a tax pool?

This is where the tax pool comes in; it is basically a record of the running total of income tax that has been paid by them and if, at the end of the tax year, enough hasn’t been paid to cover the 45% tax credit, then they owe the difference to HMRC paid through self-assessment.

The tax pool, therefore, is a record of the total income tax paid, which can be used to offset the tax credit when a payment is made to a beneficiary. The pool is then reduced by the appropriate amount. If there is a balance outstanding, then this can be carried forward to the next tax year and used to offset against future payments.

The tax pool record is sent to HMRC when the trustees submit their tax return.

Over to You…

If you are someone who sat the the last AF1 exam, were you caught off-guard by the question on tax pools?

Grab the resources you need!

If you’re studying for your CII AF1 exam, and you want to be prepared on exam day, grab our free taster to try out one of Brand Financial Training’s resources for yourself.  Click the link to download the AF1 calculation workbook taster now!

Alternatively, you can download taster resources for AF5, J02 or R03 if one of those exams is looming on your horizon.