Tolley® Exam Training PERSONAL INCOME TAX CHAPTER 5

CHAPTER 5

OTHER TAXABLE INCOME

In this chapter you will cover the taxation of the following income:
– casual earnings
– trust income
– income from unit trusts
– joint income
– qualifying care receipts

5.1 Other Income

Casual Earnings

S.687 ITTOIA 2005 taxes any income that has not been taxed elsewhere. In practice
you will find that most forms of income are already taxed, so there are very few
sources of income that are taxed under s.687. ITTOIA 2005, s.687

Casual earnings are earnings from work, but are not from an employment so are
not caught under the rules taxing income from earnings. Similarly they are not
earnings from self-employment so they are not taxable as trading income. An
example of this may be an employee who does a one-off job for somebody else,
other than his main employer. This one-off job is not taxable as trading income as
he is not carrying out a trade. However, the income is taxable, so HMRC will tax it
under s. 687 as non-savings income.

Patent Rights

Any profit received on the sale of patent rights is taxed under s.587 ITTOIA 2005.
Again, it is non-savings income. ITTOIA 2005, s.587

5.2 Trust Income

A taxpayer may also receive trust income. The way in which this type of income is
taxed depends on what type of trust it comes from.

You may come across a taxpayer receiving income from a discretionary trust. If a
taxpayer receives income from a discretionary trust in 2018/19, he is deemed to
have done so net of 45% tax deducted at source. ITA 2007, s.494

However, the gross amount of discretionary trust income must be included in the
income tax computation. It is therefore necessary to ‘gross up’ the net figure by
multiplying it by 100/55 to give the gross figure to enter into the tax computation.

Therefore, if a taxpayer receives £660 of discretionary trust income, this is received

net of a 45% tax credit. We take the net figure of £660 and gross it up by
multiplying by 100/55 to give gross trust income of £1,200.

660 × 100/55 = £1,200

Income from a discretionary trust is always regarded as non-savings income. It will

therefore be entered into the first column in the income tax computation. The

© RELX (UK) Limited 2018 41 FA 2018

Tolley® Exam Training PERSONAL INCOME TAX CHAPTER 5

individual can deduct the 45% tax credit from his tax liability when calculating the
tax due.

Occasionally you will come across a taxpayer who receives income from some
other type of trust, for instance a trust called an interest in possession trust.

Where non savings and savings income is received by the trust it will be taxed in
the hands of the trustees at 20%. Dividend income will be taxed at a rate of 7.5%.
The dividend allowance is not available when calculating tax payable by trustees.
Similarly, the savings allowance is not available when calculating tax payable by
trustees.

The income paid out to an individual by the trust retains its nature and therefore is
either non-savings/savings income received net of basic rate tax or dividend
income received net of 7.5% tax.

The gross income is entered into the tax computation, so non savings and savings
income is grossed up by 100/80 and dividend income is grossed up by 100/92.5 to
arrive at the gross figure. The individual is entitled to deduct the associated tax
credit when calculating his tax due.

The income is then taxed as any other non savings/savings/dividend income in the
hands of the recipient, taking into account the savings allowance and dividend
allowance.

Where a question deals with income from an interest in possession trust it will state
the type of income which has been received. In practice, the recipient will receive
a certificate from the trustees (form R185) which sets out the type of income
received and the amount of tax deducted.

 Illustration 1

Andy receives £10,000 from the Broadman Interest in Possession Trust in 2018/19.
The form R185 received from the trustees shows the payment is made up as
follows:

Type of income Net Amount Tax deducted

£ £
Savings 6,000 1,500
Dividends 4,000 324

Andy's only other sources of income for 2018/19 were his salary of £50,000 (PAYE
deducted £8,800) and bank interest of £625.

Calculate Andy's income tax due.

Andy's tax due will be calculated as follows:

Non Savings Interest Dividends

£ £ £
Employment income 50,000
Bank interest 625
Trust income
– interest (6,000 × 100/80) 7,500
– dividends (4,000 × 100/92.5) ______ _____ 4,324
Net Income 50,000 8,125 4,324
Less: Personal allowance (11,850) _____ _____
Taxable Income 38,150 8,125 4,324

© RELX (UK) Limited 2018 42 FA 2018

Tolley® Exam Training PERSONAL INCOME TAX CHAPTER 5

Tax
34,500 @ 20% 6,900
3,650 @ 40% 1,460
500 @ 0% Nil
7,625 @ 40% 3,050
2,000 @ 0% Nil
2,324 @ 32.5% 755
Tax liability 12,165
Less: PAYE (8,800)
Less: Tax on trust income (1,500 + 324) (1,824)
Tax due 1,541

Andy’s tax liability is £12,165. In calculating his tax due to be paid, not only does he
deduct the tax suffered at source on his employment income but also the tax paid
by the trust in respect of the interest and dividend income.

5.3 Settlor Interested Trusts

If the person who sets up the trust, (the settlor), has an “interest” in the trust, i.e. he
can benefit from either the trust income or the assets of the trust - the whole of the
income received by the trust is taxed on the individual as if it were received by
him. The settlor is also treated as having an interest in the trust property if his or her
spouse can benefit from the trust. ITTOIA 2005, s.624

The settlor will be entitled to a tax credit in respect of the tax paid by the trustees in
respect of the income. However, if the settlor receives a tax repayment with
respect to the trust income, this repayment will need to be repaid to the trustees.
ITTOIA 2005, s.646

A settlor may receive a repayment of tax if he is taxable at a lower rate than the
trustees. As the trustees of discretionary trusts are subject to tax at 38.1% on
dividend income and 45% on other income in 2018/19, this provision prevents
significant numbers of settlors who are not additional rate taxpayers from receiving
the benefit of refunds of tax paid by the trustees.

Equally, if the repayment results from an allowance or relief available to the settlor
it must still be passed to the trustees.

5.4 Parental Settlements

Anti avoidance rules exist to prevent a parent from diverting income to a minor
child in order to utilise the child's personal allowances and/or basic rate band.
ITTOIA 2005, s.629

Where a parent (or step-parent) provides funds to or for the benefit of a child (or
step-child), any income arising from those funds is taxed in the hands of the
parent. This will include circumstances where a parent sets up a trust for a child or
simply places funds on (say) a building society account for the child.

The parental settlement rules only apply where the funds are settled by a parent
(not by a sibling or grandparent) and where the child is under the age of 18 and is
unmarried.

There is an exception where the gross annual income generated by the parental
funds is £100 or less. In this case, the income would be taxed on the child (and
presumably covered by personal allowances).

© RELX (UK) Limited 2018 43 FA 2018

Tolley® Exam Training PERSONAL INCOME TAX CHAPTER 5

5.5 Unit Trusts

It is common to come across taxpayers who receive distributions from unit trusts.
Unit trusts will distribute their profits to the unit holders in the form of either dividends
or interest.

If a taxpayer receives a dividend from a unit trust, we tax that dividend in the
same way as other dividend income. ITTOIA 2005, s.389

If a unit holder receives an interest distribution from a unit trust from 2018/19, the
interest will be received gross and taxed in the same way as other interest.
ITTOIA 2005, s.376

5.6 Company Loan Stock Interest

Interest income may also be received by an individual in respect of a loan note

(debenture) issued by a company.

Interest income on company loan notes is received net of 20% basic rate tax. The
company will withhold tax before paying the interest to the taxpayer. The taxpayer
therefore receives the net amount, after tax has been deducted. However, where
interest is received net, we always enter the gross amount in the income tax
computation. The interest received net must be ‘grossed up’ by multiplying it by
100 over 80. This gross figure is included in the income tax computation.

The individual can deduct the 20% tax credit from his tax liability when calculating
tax due.

Interest income received on a quoted Eurobond is received gross. A quoted

Eurobond is an interest bearing security that is issued by a company and which is
quoted on a recognised stock exchange. ITA 2007, s.987

5.7 Joint Income

The most common example of joint income is income received jointly by spouses
or civil partners. This could be a bank account held in joint names, or shares held in
joint names, where the interest or the dividend needs to be split between the two
taxpayers.

 Illustration 2

A husband and wife jointly own a property. Assume the husband's share is 60% and
the wife's share is 40% of the property – so this property is jointly owned between
them although not in equal parts. The property is let out and produces rental
income which is taxed as property income.

Explain the two ways of treating the joint income.

The most common way is to simply split the income equally between the two
parties regardless of their actual shares in the property. 50% of the income is taxed
in the hands of the husband, and goes into his tax computation. The remaining
50% of the rental income is taxed in the hands of the wife and goes into her tax
computation. ITA 2007, s.836

It is important to note here, that the UK has a regime known as “Independent

Taxation”, whereby the income of spouses or civil partners is always kept separate
and is never aggregated together.

© RELX (UK) Limited 2018 44 FA 2018

Tolley® Exam Training PERSONAL INCOME TAX CHAPTER 5

The second way to treat joint income is for the taxpayers to make an election to
split the income in accordance with their beneficial entitlement in the property. If
the husband and wife make such an election the husband will be taxed on 60% of
the income, being equivalent to his ownership of the property; and the wife will be
taxed on the remaining 40%. ITA 2007, s.837

If the taxpayers prefer this treatment, they must make an election to this effect. If
no election is made, HMRC will simply split the income equally between the two
parties. The declaration must be notified to HMRC within 60 days of the date of the
declaration and applies to income arising on or after the date of the declaration.

There is a special rule relating to dividends from jointly held shares in certain small
companies called close companies. Such dividend income must be split in
accordance with the beneficial entitlements of the spouses or civil partners.

5.8 Qualifying Care Relief

Relief is available where an individual has qualifying care receipts.

An individual will have qualifying care receipts if they provide foster care or shared
lives care. ITTOIA 2005, s.803

The relief only applies to receipts from specified social care schemes and does not
apply to private care arrangements.

If total receipts from qualifying care in the tax year do not exceed the individual's
limit (often referred to as the qualifying amount), the receipts will not be subject to
tax, either as trading income or other income. ITTOIA 2005, ss.812-814

When calculating total receipts for these purposes, no relief is given for any
expenses incurred in relation to the provision of the care; it is the gross receipts
which are compared to the qualifying amount. ITTOIA 2005, s.807

If the gross qualifying care receipts exceed the individual's qualifying amount for
the year, the individual has two options for calculating the amount of income on
which tax will be payable.

Firstly, the individual can be taxed on the gross receipts minus any expenses or
capital allowances as normal. This is referred to as the profit method.

Alternatively, the individual will be assessed on the gross qualifying care receipts
less their individual qualifying amount. This is referred to as the simplified method.
ITTOIA 2005, ss.815-818

If the individual wants the simplified method of calculation to apply an election

must be made by the first anniversary of 31 January following the end of the tax
year. An election for 2018/19 must be made by 31 January 2021.

The individual may not want to make an election for the alternative method if their
expenses and any available capital allowances exceed their individual limit.

An individual's limit (or qualifying amount) is made up of two elements:

• A fixed amount of £10,000 per annum;

• A weekly amount for each person placed with them.

© RELX (UK) Limited 2018 45 FA 2018

Tolley® Exam Training PERSONAL INCOME TAX CHAPTER 5

The weekly amount is £200 for each child aged under 11 and £250 per week for
each adult or child aged 11 or over. These amounts are provided in the tax tables.

The fixed amount is proportionately reduced where the individual is a carer for less
than a full year.

 Illustration 3

Joyce provides foster care for one child aged 14 for the whole of 2018/19 and for
one child aged 8 for ten weeks of the year. She has an accounting date of 5 April
and receives total qualifying care receipts of £20,000 in 2018/19.

Explain the amount Joyce will be assessed on.

Joyce's individual limit is:

£
Fixed amount 10,000
Child 1 (250 × 52) 13,000
Child 2 (200 × 10) 2,000
Qualifying amount 25,000

Her qualifying receipts of £20,000 are less than her limit of £25,000 therefore she will
not be assessed on the income in 2018/19.

 Illustration 4

Assume that the facts are the same as in the previous Illustration but this time
Joyce receives qualifying care receipts of £30,000.

Explain the amount Joyce will be assessed on.

As the qualifying care receipts exceed her limit, Joyce will be taxed on some of
the income.

Joyce has an accounting period which ends on 5 April so her gross trading
receipts will be £30,000. She has allowable expenses and capital allowances of
£22,000.

Under normal principles, Joyce will be taxed on:

£
Gross receipts 30,000
Less: Expenses and capital allowances (22,000)
Taxable Profits 8,000

Alternatively, Joyce could elect to be taxed on:

£
Gross receipts 30,000
Less: Limit (as per previous illustration) (25,000)
Taxable amount 5,000

Note that if Joyce elects for the alternative simplified method, she cannot deduct
her expenses and cannot claim capital allowances. In this instance, Joyce should
elect for the alternative calculation.

© RELX (UK) Limited 2018 46 FA 2018

Tolley® Exam Training PERSONAL INCOME TAX CHAPTER 5

If the residence used to provide the qualifying care is used by two or more carers,
then each individual carer is entitled to a share of the fixed amount of £10,000. So
if there are two individuals providing care, each will be entitled to a fixed amount
of £5,000.

© RELX (UK) Limited 2018 47 FA 2018

Tolley® Exam Training PERSONAL INCOME TAX CHAPTER 5

EXAMPLES

 Example 1

Jonathan received the following income in 2018/19:

£
Income from a discretionary trust 14,300
Casual earnings 4,000
Interest on NS&I Investment account 1,430
Dividend from unit trust 16,000

Calculate Jonathan's repayment.

© RELX (UK) Limited 2018 48 FA 2018

Tolley® Exam Training PERSONAL INCOME TAX CHAPTER 5

ANSWERS

 Answer 1

Non Savings Interest Dividends

£ £ £
Discretionary trust (14,300 × 100/55) 26,000
Casual earnings 4,000
NS&I account interest 1,430
Unit trust dividend _____ _____ 16,000
Net Income 30,000 1,430 16,000
Less: Personal allowance (11,850) _____ ______
Taxable Income 18,150 1,430 16,000

Tax
18,150 @ 20% 3,630
500 @ 0% Nil
930 @ 20% 186
2,000 @ 0% Nil
12,920 @ 7.5% 969
34,500
1,080 @ 32.5% 351
Tax liability 5,136
Less: Tax on trust income (45%) (11,700)
Tax repayable to Jonathan (6,564)

© RELX (UK) Limited 2018 49 FA 2018

Tolley® Exam Training PERSONAL INCOME TAX CHAPTER 5

OTHER TAXABLE INCOME

Income is taxed under s.687 ITTOIA 2005 if it is income not taxed elsewhere. The most
common example is casual earnings.

Profits on sale of patent rights are taxed under s.587 ITTOIA 2005.

Income from discretionary trusts is grossed up by 100/55 and the 45% tax credit is
deducted to find tax due. Such income is always treated as non-savings income.
(s.494 ITA 2007)

Income received by an interest in possession trust is taxed in the hands of the trustees at
20% for non savings/savings and 7.5% for dividends. The income paid out by the trust
retains its nature in the hands of the beneficiaries. Non savings and savings income will
need to be grossed up by 100/80 and dividend income by 100/92.5 in order to arrive at
the gross amounts to enter into the tax computation. The gross amounts will then be taxed
as any other non savings, saving or dividend income. The tax credits are deducted to find
tax due.

Settlor interested trusts arise where the person who sets up the trust, (the settlor) or his
spouse can benefit from either the trust income or the assets of the trust. The whole of the
income received by the trust is taxed on the individual as if it were received by him. The
settlor is entitled to a tax credit for the tax paid by the trustees but any tax repayment
received in respect of the income must be repaid to the trustees.
(s.624 ITTOIA 2005)

Where a parent provides funds to a child, under the Parental Settlement rules, any income
subsequently arising will be taxed on the parent. The rules apply where:

• Funds are settled by a parent; and

• The child is under 18 and unmarried; and

• The gross annual income > £100.

(s.629 ITTOIA 2005)

Unit trusts distribute interest or dividends. Interest is received gross and taxed as normal
savings income. Dividends from unit trusts are taxed in the normal way.

Company loan stock interest is received net of a 20% tax credit and has to be grossed up
in the tax computation. It is then taxed as normal savings income. The tax credits are
deducted to find tax due.

Joint income is split equally between the parties unless an election is made for it to be split
according to their beneficial entitlement.
(s.837 ITA 2007)

Where an individual receives qualifying care receipts which do not exceed the individual's
qualifying amount, the payments are not subject to tax.
(ss.813–814 ITTOIA 2005)

If the qualifying care receipts exceed the individual's qualifying amount, the individual will
be assessed on the gross receipts less any allowable expenses as normal. Alternatively,
the individual can elect to be assessed on the gross receipts less the qualifying amount.

© RELX (UK) Limited 2018 50 FA 2018

Tolley® Exam Training PERSONAL INCOME TAX CHAPTER 5

(ss.816–818 ITTOIA 2005)

The individual's qualifying amount is made up of a fixed amount of £10,000 per annum plus
a weekly amount per person placed with them (£200 per week for a child aged under 11
and £250 per week for anyone else).

© RELX (UK) Limited 2018 51 FA 2018