Income/ capital from deeply discounted bond?


(Cliona O'Tuama) #1

One of my long-standing clients, a retired chartered accountant, is the trustee of a family will trust. The other trustee is his daughter, a retired solicitor. Under the terms of the will in question, the daughter of the deceased is entitled to all the income from the will trust and on her death the remainder will pass to the deceased’s grandchildren. The will trust’s portfolio is managed by a well-respected firm of asset managers. Although I extracted the Grant of Probate in the estate in question, I have not been involved in the day to day administration of the will trust, which my client and his daughter are well capable of doing.

One of the investments in the will trust was a deeply discounted bond which has recently been redeemed. On redemption there was a profit, which included an inflationary element. The asset managers told my client that the whole profit, not just the inflationary element, is liable to income tax. Be that as it may, my question is whether from a legal and trust point of view the profit is payable in its entirety to the life tenant or whether, although it may be taxed as income, it is in fact capital growth, which should be added to the capital of the trust to be distributed to the grandchildren in due course.

I have not come across this issue previously, so would welcome the Forum’s views.

Cliona O’Tuama
Solicitor


(Paul Saunders) #2

I suggest the starting point is to review the terms of the bond, which may identify if the “profit” is a capital or income distribution (or a mixture thereof).

There seem to be an increasing number of scenarios where a trustee’s receipt of capital is taxed as income.

Paul Saunders


(Simon James Northcott) #3

Also check out Trusts (Capital and Income) Act 2013, which may help

Simon Northcott