Does undistributed income retain its character?

[beckied]

Does undistributed income (no power to accumulate) within a discretionary trust retain its character as income even if it is invested in a capital asset such as shares. For example when the shares are sold you have a capital receipt but can a distribution made out of this receipt still be treated as income (to utilise the tax pool) even though it is out of a capital receipt?

[pawncob]

Income remains as income even when it's invested.

[AvocadoK]

(no power to accumulate) within a discretionary trust retain its character as income even if it is invested in a capital asset such as shares.

If there is no power to accumulate income, you can't invest the income - you have to pay it out.

If you sell shares and pay out the proceeds, you are distributing capital, not income.

AK

[maths]

I agree with the comments above.

Typically, the trustees of a discretionary trust maintain both income and capital accounts. Thus, any income which arises in the tax year remains as income for that year even if it is used to, say, purchase shares. The trustees could therefore distribute income up to the amount of the income generated.

Normally a power to accumulate exists under which the trustees instead of distributing income to beneficiaries may simply accumulate it (ie turn it into capital).

Where, however, no such power exists then the trustees have no choice but to distribute the income amongst the beneficiaries.