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Where Taxpayers and Advisers Meet

Discretionary trust – retaining income after end of Accumulation Period

Anicetry
Posts:32
Joined:Wed Aug 06, 2008 4:00 pm
Discretionary trust – retaining income after end of Accumulation Period

Postby Anicetry » Mon Feb 19, 2018 11:32 pm

Discretionary family trust:

–– Accumulation period has ended

–– No imperative to make any distributions as beneficiaries currently have a surfeit of alternative income

–– What are the ramifications of retaining the trust income indefinitely (though not converting it to capital)?

AGoodman
Posts:1738
Joined:Fri May 16, 2014 3:47 pm

Re: Discretionary trust – retaining income after end of Accumulation Period

Postby AGoodman » Tue Feb 20, 2018 4:08 pm

from a trust perspective, it will be a breach of trust.

For tax, it will depend on the terms of the trust but that will likely attribute the income to the default beneficiary(ies). They will then be liable for the income tax and also have a claim against the trustees.

Anicetry
Posts:32
Joined:Wed Aug 06, 2008 4:00 pm

Re: Discretionary trust – retaining income after end of Accumulation Period

Postby Anicetry » Wed Feb 21, 2018 1:00 am

<<from a trust perspective, it will be a breach of trust.>>

What if the income is merely being held until a more appropriate moment for payment (with the agreement of the beneficiaries) – still a breach of trust?

What are the ramifications of a breach of trust? What sanctions are available and applied by whom – who holds a private trust to account?

<<For tax, it will depend on the terms of the trust but that will likely attribute the income to the default beneficiary(ies). They will then be liable for the income tax and also have a claim against the trustees.>>

I take it you mean the beneficiary will be deemed to have received income whether they have or not, and hence liable to tax? But if the income has been taxed within the trust, they surely will have no further liability to tax.

AGoodman
Posts:1738
Joined:Fri May 16, 2014 3:47 pm

Re: Discretionary trust – retaining income after end of Accumulation Period

Postby AGoodman » Wed Feb 21, 2018 10:43 am

If the trustees are just holding onto the monies for the beneficiaries then that is fine from a trust perspective. Beneficiaries enforce a private trust so, if they are in full agreement, they cannot later complain. Bear in mind that the relevant beneficiaries would be those who should have received the income in default.

For tax, I don't think you can get away from the fact that the beneficiaries who should have received the income (possibly under some form of implied IinP) have the income tax liability. If the trustees have paid trust rate income tax then tax has been paid but they have paid wrongly and it doesn't necessarily follow that their credit would be accepted by HMRC against the beneficiaries' liability. In practice HMRC probably would accept it but after circa 4 years the position can only be readjusted at the discretion of HMRC - after that the trustees cannot correct their return and recover the tax to allow the beneficiaries to pay theirs. It might be fine if the beneficiaries only have a basic rate liability as the trustees would probably be due to pay this anyway.

The other point is the basis on which the trustees are holding that income. The default would be that they are just holding onto it for the relevant beneficiaries (it is "resting in their account"). The alternative is that the beneficiaries have agreed to resettle the monies on some new trusts which have departed from the written trusts. If large sums, this could have IHT consequences as well.

Basically, unless this is a very tight family, the trustees are getting themselves into a muddle which would be easy to resolve now but much harder in 5/10 years time.

Anicetry
Posts:32
Joined:Wed Aug 06, 2008 4:00 pm

Re: Discretionary trust – retaining income after end of Accumulation Period

Postby Anicetry » Thu Feb 22, 2018 9:17 pm

Thanks AGoodman. By default beneficiary(s) do you mean the primary beneficiary(s)?

The trustees are still exercising discretion and paying out some income – just not all of it. So I don't think the trust can be deemed to have become Interest in Possession, or that Trust Rate Tax is no longer appropriate. The income is, as you say, resting in the trustees' account.

What's your view of income that arose before the end of the Accumulation Period – also still "resting" ?


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