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Where Taxpayers and Advisers Meet

life trust/mandated income/accumulation units

uncle john
Posts: 10
Joined: Mon Nov 21, 2016 12:15 pm

life trust/mandated income/accumulation units

Postby uncle john » Wed Jan 01, 2020 5:51 pm

Good afternoon

I'd be grateful if anyone has any views on the following.

I'm a trustee of a life trust. Income from investments is paid directly to the beneficiary by the investment manager as it arises. This is to avoid the trust having to file a tax return.

However, the investments now include some accumulation units of a unit trust, where dividends are automatically reinvested - so there is no cash distribution to the beneficiary. I know that income tax is nevertheless due on these reinvested dividends, just as it would be if the income were to be paid out. But does the fact that no cash is paid out to the beneficiary mean that this income can't be regarded as received by the beneficiary, and hence the trust will have to declare them?

thanks

AGoodman
Posts: 1043
Joined: Fri May 16, 2014 3:47 pm

Re: life trust/mandated income/accumulation units

Postby AGoodman » Fri Jan 03, 2020 4:28 pm

I think that's right but on the basis that the trustees are liable (at basic rate) because they receive additional units representing the income.

(HMRC's view is that they trustees escape mandated income because they do not receive it)

There's also a question of whether the additional units belong to the life tenant (beneficially), rather than the trust. I don't have direct experience but it seems a sensible conclusion.

AGoodman
Posts: 1043
Joined: Fri May 16, 2014 3:47 pm

Re: life trust/mandated income/accumulation units

Postby AGoodman » Fri Jan 03, 2020 4:56 pm

Actually, take that all with a pinch of salt, not least because (I now realise) unit trusts don't actually issue additional units to those holding accumulation units.

I think the answer probably remains the same - the trustees bear income tax liability on the notional distribution because the value is within their hands (in the form of their units increasing in value). Just as importantly, it has not been paid to the beneficiary.

The trust problem I mentioned doesn't arise but there may still be a query whether the trustees should be investing in this way as it defeats the interest of the life tenant.

maths
Posts: 7895
Joined: Wed Aug 06, 2008 3:25 pm

Re: life trust/mandated income/accumulation units

Postby maths » Sat Jan 04, 2020 5:46 pm

Where a dividend is declared re accumulation units no dividend is actually paid and no additional units are purchased/distributed. The value of the units increases and the base cost of the units for CGT is adjusted.

However, the notional dividend is subject to income tax on the part of the trustees as it constitutes taxable income.

However, for trust law purposes no actual income is received by the trustees and hence there is nothing to which the life tenant is entitled.

uncle john
Posts: 10
Joined: Mon Nov 21, 2016 12:15 pm

Re: life trust/mandated income/accumulation units

Postby uncle john » Tue Jan 07, 2020 12:30 am

Thank you both for your very helpful replies.


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