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Where Taxpayers and Advisers Meet

Can trust income be classed as capital temporarily?

Trustworthy
Posts: 2
Joined: Thu Feb 13, 2020 11:49 pm

Can trust income be classed as capital temporarily?

Postby Trustworthy » Fri Feb 14, 2020 12:02 am

Income that arose within the share portfolio of a discretionary trust prior to the accumulation period ending was invested pending distribution. It is recorded as 'Undistributed income' in the accounts, whereas in the investment report it is shown as a Capital investment.

Is this mismatch perfectly normal? As long as the accounts say it's income, does it continue to be income despite having been temporarily capitalised by the investment managers?

Does any additional income arising from this investment also go into the 'Undistributed income' pot, thus boosting the amount available for distribution when that occurs?

Thanks.

AGoodman
Posts: 942
Joined: Fri May 16, 2014 3:47 pm

Re: Can trust income be classed as capital temporarily?

Postby AGoodman » Fri Feb 14, 2020 10:59 am

The label put on it by the investment managers is pretty much irrelevant.

The investment of discretionary income does usually imply accumulation so I would want to be sure that the trustees' intention was not to accumulate. The accounts are very helpful in this. There may be some more detailed rules from precedent of which I am unaware but that would require somebody to consult a book...

Not whether you are primarily concerned about the tax or trust treatment. Many trust deeds include a power to allow income that has been accumulated to be later paid out as income but that might not help you from a tax perspective.

maths
Posts: 7679
Joined: Wed Aug 06, 2008 3:25 pm

Re: Can trust income be classed as capital temporarily?

Postby maths » Fri Feb 14, 2020 5:18 pm

Unfortunately no formality is required to accumulate income within the trust.

In practice the trust minutes should confirm if an accumulation has occurred (ie following a resolution of the trustees) failing which a review of the trust accounts may be of help.

Any decision to accumulate is irrevocable.

Where trust income has been applied to purchase a capital investment it does not necessarily follow that the income has been accumulated and in the trust accounts may be shown as retained income.

The view of any investment advisor is irrelevant.

Trustworthy
Posts: 2
Joined: Thu Feb 13, 2020 11:49 pm

Re: Can trust income be classed as capital temporarily?

Postby Trustworthy » Sat Feb 15, 2020 12:01 am

Thank you both. I am not aware of any minuted decision to accumulate. I don't know exactly what previous trustees had in mind but I suspect there was simply too much income to distribute in a timely manner. I have the tax repercussions in mind, but HMRC have clearly acknowledged that income isn't always paid out as it arises, by deeming that income that remains undistributed after 5 years at the date of the 10 year IHT charge is taxed as though it were capital. And now I think about it, they can hardly imagine that undistributed income is going to be left languishing in a deposit account for all that time.


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