Please help - accounting exam question! Interest in Possession Trusts...

[Straightouttabrompton]

Can anyone help? Would be hugely grateful.

Currently doing long ACA question regarding IIP trusts for the TC paper.

In order to work out the beneficiary's tax position, I have to present the net income and tax credit arising from the NSI/SI/DI portions of the trust. This all makes sense to me, and all are taxed at basic rate.

However the final stage in the calculation is to "recalculate dividend income tax credit for beneficiary" - the calculation is:

(gross dividends - tax paid - trust expenses)/92.5*7.5

Can anyone please explain why this needs to be done? For NSI and SI income the tax credits are simply basic rate multiplied by gross amount.

Huge thanks in advance

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Hmm, I think this might be because of the changes to dividend tax credits this year. Will reread the legislation and have a think.

Okay:

Trust expenses come off dividends first.

So you get the gross div, then you tax it.

Eg 1000 income, tax at 7.5%

So less (75)

Gives 925 income for the trust

Then take off trust expenses e.g. 200

Gives distributable income of 725 relating to dividends

So then the life tenant receives the 725 and a tax credit based on the amount they actually receive

So we gross the 725 back up to its pre tax amount by multiplying by 100/92.5 to give 783.78 then work out how much tax they would have paid on that: 783.78*0.075 gives us the tax they paid = 58.78 (so 783.78-58.78 = 725, the net amount received).

The calculation you're doing does the grossing up and taxing all in one go

Eg above I've done 725100/92.57.5/100 but you can cancel the hundreds and reduce it to a single step.

I wouldn't personally do it as I think I'd get muddled.

Hope that helps!