A life interest trust has been in receipt of mineral royalties for gravel extraction from farmland owned by the trustees. 25% of the royalties have been paid to the life tenant who agreed to release the remaining 75% (that would otherwise have been added to trust capital) to the remaindermen. Trust law dictates this 25%/75% apportionment of the royalty income between income and capital.
This arrangement continued for the six years preceding the life tenants death. All of the royalties were charged to income tax on the trustees - TSEM3196 sets out HMRC’s instructions…
Can these capital appointments qualify for IHT exemption as gifts from surplus income? Otherwise, they will have suffered income tax at 20% and now IHT at 40%, which does not seem right.
In short, does the deeming provision that treats the capital element as income apply for all tax purposes?
Whiting & Partners