Beneficiaries or legatees from either a trust or a death estate may be paid income during the tax year by the trustees or the personal representatives (PRs). Unless directly mandated to the taxpayer, these amounts will generally have already been taxed on the trustees or PRs, such that the beneficiary will receive the income net of tax into their bank account.

However, the receipts need to be taxed on the beneficiary at their own rate of tax. This means that the beneficiary must calculate the tax on the gross amount, and then any tax paid already by the trustees, or the PRs can be offset against the tax liability calculated on them.

Form R185 gives the beneficiaries the information they need to do this.

What information is needed?

The detail on the Form R185, therefore, will encompass three elements: the gross amount of the income earned by the trustees or PRs and sent out to the beneficiaries; the precise amount of tax that was paid over to HMRC by the trustees or PRs on behalf of the beneficiaries; and the net amount that was paid into the beneficiaries’ bank account.

Example: Form R185 – Interest in possession (IIP) trust

In the tax year 2022/23, Auron received £10,000 in non-savings income and £2,500 savings income from a life interest in a trust set up on his uncle’s death.

Auron held a job as a barman, earning £25,000. He received £200 in interest from his building society account and had paid £7,500 through PAYE in the same tax year. The R185 from the trustees showed the following:

Auron will need to enter £12,500 onto self-assessment Form SA107, which is the supplementary page where taxpayers need to record trust and estate income. The £10,000 non-savings income received along with the £25,000 employment income will be taxed after the £12,570 personal allowance as non-savings income at 20%, leading to tax of £4,486.

Next, the savings income of £200 earned personally and the £2,500 earned through the trustees will be taxed. As Auron is a basic rate taxpayer, he is entitled to use the personal savings nil rate of 0% against the first £1,000 of this, meaning only £1,700 is taxed at 20%: so tax of £340. This will give Auron a total tax payable for the year of £4,826.

However, because he has already paid tax on the income from the trust and from his bar work through PAYE, these amounts can be deducted. He will need to refer to his form P60 to establish the exact amount of the tax deducted through PAYE, but the tax paid by the trustees is shown on the R185 as £2,500.

In total then, although Auron’s tax liability was £4,826, his overall tax position was, in fact, a repayment of £5,174 due to him from HMRC. This is because he had already paid £7,500 to HMRC through PAYE and £2,500 through the trustees of the IIP (£4,826 liability less £10,000 paid = £5,174).

Practical tip: There is quite often a repayment due to basic rate beneficiaries of a death estate or trust, as they have allowances such as the personal, savings and dividend allowances and the starting rate band that the estate or trust does not have. Even greater repayments will be due if the trust is able to accumulate income and incurs the ‘rate applicable to trusts’, which is equal to additional rate tax charges.

We can help you

This is a very complex area, and if you are affected by this, you should contact us so we can help you navigate this change in good time and with the least amount of difficulty.