What is the non-exempt amount for a charitable trust under ITA 2007 section 540?

The non-exempt amount is the lower of the charitable trust's non-charitable expenditure (amount A) and its attributable income and gains (amount B) for a tax year. It determines how much of the trust's normally exempt income and gains loses its tax-exempt status and becomes subject to income tax or capital gains tax.

How is the non-exempt amount calculated under section 540 of the Income Tax Act 2007?

Two figures are compared: amount A, the trust's total non-charitable expenditure, and amount B, its attributable income and gains. The non-exempt amount is whichever figure is smaller. This ensures the tax clawback never exceeds the trust's non-charitable spending or its total exempt income and gains for the year.

What are attributable income and gains for the purposes of section 540?

Attributable income is the trust's income exempt from income tax under Part 10 of ITA 2007. Attributable gains are gains exempt from capital gains tax under section 256(1) of TCGA 1992. These two amounts are added together. Crucially, they are calculated before any restrictions under section 539(2) or section 256(4) are applied.

Can the non-exempt amount exceed the charitable trust's total exempt income and gains?

No. The non-exempt amount is capped at the lower of non-charitable expenditure and attributable income and gains. Even if a trust's non-charitable spending exceeds its exempt income and gains, the clawback is limited to the total amount that was exempt. For example, £150,000 of non-charitable spending with £100,000 of exempt income results in a £100,000 non-exempt amount.

Income Tax Act 2007 section 540

The non-exempt amount

Section 540 explains how to calculate the non-exempt amount for a charitable trust in a given tax year, which determines how much of the trust's normally exempt income and gains loses its tax-exempt status because of non-charitable spending.

A charitable trust has a non-exempt amount when it has both non-charitable expenditure (amount A) and attributable income and gains (amount B) in the same tax year
The non-exempt amount is the lower of amount A (non-charitable expenditure) and amount B (attributable income and gains)
Attributable income and gains means the total of the trust's income that would be exempt from income tax under Part 10 plus any gains that would be exempt from capital gains tax under section 256(1) of TCGA 1992
When calculating attributable income and gains, you ignore any restrictions that have already been imposed by section 539(2) of ITA 2007 or section 256(4) of TCGA 1992

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