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Income Tax Act 2007

Overview

1411.This Chapter provides for expenses incurred by trustees to reduce the amount of income chargeable at the special trust rates.

1412.Beyond a few basic rules, it is left to trust law to determine what expenses may be taken into account. Generally, it is only expenses incurred in the course of exercising the trustees’ duties and powers and solely in managing the trust assets to produce or maintain an income flow which are allowable.

1413.The label “management expenses” has not been used. It does not carry any weight and omitting it avoids giving the impression that all expenses incurred in the course of managing a trust will necessarily be allowable.

Section 484: Trustees’ expenses to be set against trustees’ trust rate income

1414.This section concerns the trustees’ expenses which are to be taken into account in calculating the extent of the income chargeable at the special trust rates. It is based on sections 686(2AA) and 689B(1) of ICTA.

1415.Subsection (1) provides that the section applies where the trustees incur allowable expenses. This is in contrast to the source legislation which requires the expenses to have been defrayed. See Change 87 in Annex 1.

1416.Subsection (4) provides that where allowable expenses are set against income chargeable at the special rates, the income is instead charged at the rate that would normally apply to that type of income.

1417.Subsection (5) provides basic rules regarding what constitute allowable expenses.

1418.Subsection (6) makes it explicit that expenses are not allowable if they are taken into account (otherwise than under this section) in calculating the trustees’ liability for any tax year.

Section 485: Carry forward of unused expenses

1419.This section specifies how expenses are relieved if the amount paid exceeds the income of the year taxable at the special trust rates. It is new.

1420.In essence, if expenses incurred exceed income they are carried forward and allowed as soon as there is sufficient trust rate income. See Change 87 in Annex 1.

Section 486: How allowable expenses are to be set against trust rate income

1421.This section explains in step terms how allowable expenses are to be set against the trust rate income. It is based on sections 686(2AA) and 689B of ICTA.

1422.The section makes it explicit that it is the grossed up amount of expenses that is set against income charged at the special rates. (The meaning of “grossing up” is given in section 998.) See Change 88 in Annex 1.

1423.Before the grossing up process, Step 1 eliminates a proportion of expenses in the case of non-UK resident trustees in receipt of untaxed income (see section 487).

1424.Steps 2 to 6 require dividend, savings and other income to be considered in turn.

1425.Dividend income not within subsection (2) corresponds to foreign income within section 689B(2A) of ICTA.

Section 487: Non-UK resident trustees

1426.This section specifies that a proportion of the allowable expenses of the trustees is ignored if a proportion of their income is not liable to income tax (“untaxed income”). It is based on section 686(2A) and (2B) of ICTA.

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Explanatory Notes

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