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Introduction

The income of discretionary trusts is taxable on the trustees. When income is passed on to beneficiaries, they are treated as receiving it net of tax at the trust rate. The beneficiary receives a credit for the trust rate tax. If his personal rate of tax is lower than the trust rate, he is entitled to claim a repayment of the tax overcharged.

The ‘tax pool’ is a record of the tax paid from year to year by the trustees of a discretionary trust, which funds the tax credits available to the beneficiaries. If the tax credits on distributions to beneficiaries exceed the amount available in the tax pool, an additional charge is made on the trustees.

In principle, the tax pool is a reserve of income tax which is available for credit and repayment when the income is distributed to beneficiaries. However, the concept is complicated by the fact that there is a mismatch between