What is Form R185? A Simplified Guide to R185 Form and Trust Income
The R185 form helps people understand and report income received from a trust. If you're a beneficiary (someone who receives money from a trust), you’ll receive this form from the trustee (the person managing the trust). The R185 shows how much income you received and any tax the trustee has already paid on your behalf. You’ll need this information when completing your own tax return or if you’re applying for a tax refund.
Key Concepts
Trustees: These are people or organisations managing the trust's assets. They handle income, pay taxes, and distribute money to beneficiaries.
Beneficiaries: These are individuals or groups who receive income from the trust. They are responsible for including any trust income on their tax return and may be eligible to claim back some tax.
How Trust Income is Taxed
There are two main types of trusts with different tax treatments: Interest in Possession (IIP) and Discretionary Trusts (DT).
Interest in Possession (IIP):
A life tenant beneficiary receives all income from the trust each year.
Trustees pay tax at the basic rate (20%) on income before it’s given to the beneficiary.
Beneficiaries add this income to their other income when doing their self-assessment tax return.
If a beneficiary has low income, they might get a refund for some of the tax already paid by trustees. If they have higher income, they may need to pay additional tax.
Discretionary Trust (DT):
Trustees have more flexibility to distribute income or keep it within the trust.
Tax on income is charged at the additional rate (45%) to prevent beneficiaries from getting tax advantages.
When the trustees give income to a beneficiary, they’ll note it on an R185 form with a 45% tax credit.
Beneficiaries can offset this credit against their own tax rate, often resulting in a tax refund.
When and Why You Need the R185 Form
You’ll need an R185 form if you’ve received income from a trust. It helps you understand how much tax has already been paid and what, if any, additional tax you owe. Keeping this form is crucial for reporting income correctly and avoiding penalties or fines from HMRC.
Example of a Claim
Let’s say Sarah is a beneficiary of an IIP trust. She receives £1,000 from the trust this year, and the trustees have already paid 20% (£200) in tax. Sarah includes this income on her tax return. If her income level means she owes no further tax, she doesn’t pay more. If her total income qualifies her for a lower rate, she could apply for a refund of the £200 paid by the trustees.
For a DT example, suppose Alex receives £1,000 from a discretionary trust. Trustees have paid 45% tax on this income (£450). When Alex does his self-assessment, he applies the 45% tax credit. Since Alex is only taxed at a 20% rate, he can claim a refund from HMRC for the difference.
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Here’s a practical outline for a beneficiary claiming back tax paid on income received from a discretionary trust using the R185 form:
Receive the R185 Form: Trustees of the discretionary trust will issue you an R185 form. This form shows the net income you received and the tax paid by the trustees on your behalf at the higher rate (45%).
Check Your Tax Rate: Identify your personal tax rate. If your tax rate is below 45% (basic or higher rate), you’re likely due a refund for some of the tax already paid by the trustees.
Gather Other Income Details: Collect details of all your other income sources (e.g., salary, savings, or other investments). You’ll need this information when completing your Self-Assessment Tax Return.
Complete the Self-Assessment Tax Return:
Log into your HMRC account (or register if you’re new).
Navigate to the “Trust income” section and enter the income amount shown on the R185 form. You’ll also enter the 45% tax credit.
HMRC will calculate your total tax liability based on all your income sources, factoring in the tax already paid by the trustees.
Claim Tax Refund (if eligible):
After submitting the Self-Assessment, HMRC will assess whether you’re owed a refund. If your tax rate is lower than 45%, HMRC will likely issue a refund to bring your tax rate in line with your personal tax band - Usually the Trust income is paid to children so no Personal allowance is used and full Tax is reclaimed back that the Trust paid out at 45%.
Keep Records:
Save a copy of your R185 form and any supporting documents, as HMRC may request them in the future for verification.
Following these steps ensures that you correctly apply for any tax refund due and fulfil your tax Obligations.
Need Help Claiming Your Tax Refund?
Navigating the R185 form and claiming back tax can be complex. Let our expert accountants at Crypto Tax Accountants take care of it for you, ensuring a smooth and accurate process. Reach out to us for professional support and let us handle the details—so you can focus on what matters.
