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Where Taxpayers and Advisers Meet

Mandating income-Discretionary trust

umeshg1
Posts:44
Joined:Wed Aug 06, 2008 3:55 pm
Mandating income-Discretionary trust

Postby umeshg1 » Sat Dec 11, 2021 8:15 am

Can you use the process of mandating income to beneficiaries of a "pure" discretionary trust as opposed to the life tenant of an lifetime interest in possession trust

AGoodman
Posts:1419
Joined:Fri May 16, 2014 3:47 pm

Re: Mandating income-Discretionary trust

Postby AGoodman » Mon Dec 13, 2021 12:22 pm

You can mandate the income but:

- I don't think it will prevent the trustees being assessed for tax on the income;
- It is an odd thing to do for a discretionary trust - it arguably creates a revocable interest in possession for the beneficiary
- to bring it full circle, if you did create a revocable interest in possession, the mandating would work for income tax - but this is not the way to go about it (with massive uncertainty).

maths
Posts:8430
Joined:Wed Aug 06, 2008 3:25 pm

Re: Mandating income-Discretionary trust

Postby maths » Mon Dec 13, 2021 8:31 pm

I must confess to never having had to consider the issue raised. As AG indicates it does seem a strange thing to do.

Mandating income is common wrt to life interest trusts under which the trust income by-passes the trustees going straight to the life tenant. The trustees are not then subject to income tax on the income and less paperwork is generally involved.

The trustees must exercise any discretion they have wrt the beneficiaries. One of the advantages of a DT is that it allows the trustees to exercise their discretion with full knowledge of beneficiaries' circumstances at that time. The trustees are also under a duty to exercise their discretion in a timely fashion eg, say, once a year. Say, the trustees exercised a discretion in favour of beneficiary X under which X was to receive all or a % of the trust income for, say, the next 5 years. Once exercised the discretion cannot be revoked.The beneficiary would receive the income.I would suggest that this does not give rise to an interest in possession; the beneficiary is only entitled to receive the income as a consequence of the trustees exercising their discretion.

Presumably, the relevant income could, however, be mandated.

The trustees remain liable to income tax on the income as it arises to them (mandated or not).

AG is the trust expert and I would welcome his comments.

umeshg1
Posts:44
Joined:Wed Aug 06, 2008 3:55 pm

Re: Mandating income-Discretionary trust

Postby umeshg1 » Mon Dec 13, 2021 9:31 pm

Thank you both for your reply- very useful

maths
Posts:8430
Joined:Wed Aug 06, 2008 3:25 pm

Re: Mandating income-Discretionary trust

Postby maths » Tue Dec 14, 2021 5:08 pm

Following my above post and, on reflection, presumably the trustees would execute a revocable deed of appointment under which the trustees would pay over trust income to X, a beneficiary. X would then stand possessed of a non-qualifying interest in possession. As a consequence, the appointment would have no IHT consequences nor would its revocation.

No CGT consequences arise as the deed merely provides for a modification of the existing trust not the creation of a new trust.

For income tax purposes it would seem that X has a right to receive the income and thus is subject to income tax thereon. The trustees would also have a liability to income tax if they receive the income but only at the basic rate. Thus, if the income was mandated to X thew trustees would no longer be liable to income tax on the trust income.

This is different to my earlier post but believe is the better view.

strawn
Posts:72
Joined:Fri Jun 01, 2012 10:11 am

Re: Mandating income-Discretionary trust

Postby strawn » Tue Dec 14, 2021 9:14 pm

Is this helpful?

https://techzone.abrdn.com/public/iht-est-plan/discretionary-trust-dividend-tax

maths
Posts:8430
Joined:Wed Aug 06, 2008 3:25 pm

Re: Mandating income-Discretionary trust

Postby maths » Wed Dec 15, 2021 1:05 am

It addresses different issues.

strawn
Posts:72
Joined:Fri Jun 01, 2012 10:11 am

Re: Mandating income-Discretionary trust

Postby strawn » Wed Dec 15, 2021 2:24 pm

It addresses different issues.
How so? I quote: "Typically a discretionary trust will allow the trustees to appoint the income and capital of the trust as they see fit. ...

... they could appoint just the income of the trust to a beneficiary and create an interest in possession (IIP). ... The IIP doesn't need to be permanent, and it doesn’t have to apply to the whole trust fund ... And, of course, an IIP can be given to more than one beneficiary."

That seems to me to answer the original question, to wit "Can you use the process of mandating income to beneficiaries of a "pure" discretionary trust as opposed to the life tenant of a lifetime interest in possession trust?"

Why do you think otherwise?

maths
Posts:8430
Joined:Wed Aug 06, 2008 3:25 pm

Re: Mandating income-Discretionary trust

Postby maths » Wed Dec 15, 2021 4:56 pm

I only skimmed the article which was it seemed to me to primarily address the maximisation re dividend payments. You are correct that it does also look at appointing iips etc.

AGoodman
Posts:1419
Joined:Fri May 16, 2014 3:47 pm

Re: Mandating income-Discretionary trust

Postby AGoodman » Wed Dec 15, 2021 5:55 pm

I agree with maths

If you want to mandate income in order to avoid the trustees' filing and payment obligations, they can easily appoint a revocable life interest.

- Mandating income from a discretionary trust is quite possibly a breach of trust (because the trustee(s) are not really making a decision wrt the income); and
- It would not work - the argument that a mandate could create an informal I-in-P is the sort of argument HMRC might run if it suited them (or that we imagine they might) but not one a taxpayer should be relying on.


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