Statutory Trust for Minor - how to tax

Trusts Discussion
1

I have a Trust, which was created on the death of an adult, who died intestate leaving a spouse and minor child. This was in 2003 before the changes to the intestacy rules.

We have original advise from the solicitor which stated the surviving spouse had an IIP on 50%, and that the child’s share was on statutory trust until attain the age of 18. It further stated that there was no current entitlement to income (in respect of the child’s share) and that the income would be taxed at RATs.

The solicitor has now advised that whilst the child’s share is indeed contingent on him attaining 18 there was no discretion on this share of the income and that the RAT shouldn’t have applied. Instead, the child should have been taxed on his share of the income.

A vulnerable beneficiary election had been made, but as the Trust income was fully distributed it resulted in tax pool issues.

My confusion lies in how this trust (child’s share only) should be taxed. The only legal document I have seen doesn’t appear to state the Trustees responsibilities or beneficiaries entitlements, but references the Trustees executing part iv of Admin of Estates 1925.

Can anyone shed any light? my inclination is that the original position was right; the child’s shares didn’t have an express right to income and was taxable at RAT’s.

Claire Spinks
British Taxpayers

2

The child’s share is held upon statutory trusts, which require the child to attain age 18 before it vests. In the meantime, the income is subject to the trustees’ discretion under s.31 Trustee Act 1925 and, therefore, subject to RAT.

Paul Saunders

3

Surely s.31 TA applies so income is only paid on a discretionary basis and the balance is accumulated. Absent the election, I would have thought RAT applied in the normal way.

Andrew Goodman
Osborne Clarke LLP

4

Thank you Paul that’s really helpful

Claire Spinks
British Taxpayers

5

Thanks Andrew, this was the clarification I needed. I have reverted to the solicitor

Claire Spinks
British Taxpayers

6

Does not s31(2) Trustee Act 1925 mean that RAT does not apply, as the income is treated under that section as belonging to the child absolutely, in the same way as an absolute unconditional gift?

Simon Northcott

7

In answer to Simon’s question – No.

s.31(2) TA 1925 opens with the statement: During the infancy of any such person, if his interest so long continues, the trustees shall accumulate all the residue of that income. Such a direction is a trigger for the application of RAT.

This is not cancelled out by the further direction that the minor will be entitled to such accumulations.

Paul Saunders

8

I am still not sure. The accumulations in both cases belong absolutely to the infant therefore I should not have thought in either case there was scope for RAT to apply

Simon Northcott

9

Power to apply income for maintenance and to accumulate surplus income during a minority.
.

(1)

Where any property is held by trustees in trust for any person for any interest whatsoever, whether vested or contingent, then, subject to any prior interests or charges affecting that property—
.

(i)

during the infancy of any such person, if his interest so long continues, the trustees may, at their sole discretion, pay to his parent or guardian, if any, or otherwise apply for or towards his maintenance, education, or benefit, the whole or such part, if any, of the income of that property [F1as the trustees may think fit,] whether or not there is—
.
Claire Spinks
British Taxpayers

10

ITA 2007 s.479 refers to the trust rate and defines the key term “accumulation and discretionary income” for income tax purposes.

TA 1925 s.31 provides the trustees with a discretion with respect to distributing trust income for education etc and any income not so applied has to be accumulated.

Accordingly, the trust rate (dividend trust rate) will apply.

Malcolm Finney

11

s.31(2) Trustee Act 1925 directs the trustees to accumulate the “residue” of the income not distributed under s.31(1).

s.31(1) subjects the income to the trustees’ discretion (other than where it is a bare trust and s.31(1), or the whole of s.31, is disapplied).

RAT applies due to the provisions of s.31(1) and, however one might construe s.31(2), I do not believe it is negated by s.31(2).

Paul Saunders

12

Claire has set our s31(1) Trustee Act 1925, but it is s31(2) which I referred to.

Paul says that the direction to accumulate in s31(2) means the RAT applies. I do not thing this can be correct.

If a gift is left absolutely to an infant, with no contingency, then I do not believe there can be any suggestion that the RAT applies-it is a bare trust, and this is not withstanding that s31 applies to the bare trust. This is accepted by HMRC.

However, s31(2) which applies to bare trusts, and states that accumulations during infancy under a bare trust belong absolutely to the infant, applies in exactly the same way to a gift contingent on the infant attaining 18. Therefore I believe the RAT will
equally not apply in these circumstances, as if the infant dies before attaining 18, any accumulations of income will belong to his estate, notwithstanding that the capital will not.

s31(2) then goes on to say that in any other case accumulations of income during infancy shall accrue to capital, in which case the RAT will apply.

Simon Northcott

13

Thank you all for your imput on this

Claire Spinks
British Taxpayers

14

Does this mean you consider that the RAT applies to a bare trust-it does not, and if it does not apply to a bare trust, then it should not to a contingent gift at 18 for the same reason-the income and any accumulations belong to the minor.

Is this as a result of subsection 480(3)?:

480Meaning of “accumulated or discretionary income”

(1)Income is accumulated or discretionary income so far as—

(a)it must be accumulated, or

(b)it is payable at the discretion of the trustees or any other person,

and it is not excluded by subsection (3).

(2) The cases covered by subsection (1)(b) include cases where the trustees have, or any other
person has, any discretion over one or more of the following matters—

(a)whether, or the extent to which, the income is to be accumulated,

(b)the persons to whom the income is to be paid, and

©how much of the income is to be paid to any person.

(3)Income is excluded for the purposes of subsection (1) so far as—

(a)

before being distributed, it is the income of any person other than the trustees,

This appears to be supported
by the HMRC manual-TSEM1568:

For most UK trusts for minors the provisions of Section 31 Trustee Act 1925 apply during minority. Where S31 applies,
the Trustees will have discretion over the use of income for the benefit of the minor and must accumulate the balance. Where the beneficiary’s title to income is indefeasible, the income is the beneficiary’s as it arises, and we do not tax the trust as an
accumulation/discretionary trust.

Simon Northcott

1 Like
15

Section 31 is not disapplied to bare trusts; this has to be expressed in the trust deed if that is what is required.

Section 31(2) is the subsection which requires the accumulations under a bare trust, and where the contingency is entitlement at 18, to be held for the minor absolutely, and it is this I
believe to which s.480(3) and the HMRC manual extract refer , as mentioned and set out in my email of 25 March, which I have set out again below-sorry about the formatting!

Therefore I suggest this is the approach Claire takes with HMRC, thereby saving a lot of costs in completing trustee tax returns.

"Does this mean you consider that the RAT applies to a bare trust-it does not, and if it does not apply to a bare trust, then it should not to a contingent gift at 18 for the same reason-the income and any accumulations belong to the minor.

Is this as a result of subsection 480(3)?

Simon Northcott

16

As a non lawyer I note that the original post referred to part iv of Admin of Estates Act 1925, S47 of which states

Statutory trusts in favour of issue and other classes of relatives of intestate.

(1)Where under this Part of this Act the residuary estate of an intestate, or any part thereof, is directed to be held on the statutory trusts for the issue of the intestate, the same shall be held upon the following trusts, namely:—

(i)In trust, in equal shares if more than one, for all or any the children or child of the intestate, living at the death of the intestate, who attain the age of [F1 eighteen years**]** or marry under that age**[F2 or form a civil partnership under that age]** , and for all or any of the issue living at the death of the intestate who attain the age of [F1 eighteen years**]** or marry**[F3 , or form a civil partnership,]** under that age of any child of the intestate who predeceases the intestate, such issue to take through all degrees, according to their stocks, in equal shares if more than one, the share which their parent would have taken if living at the death of the intestate, and so that**[F4 (subject to section 46A)]** no issue shall take whose parent is living at the death of the intestate and so capable of taking;

(ii)The statutory power of advancement, and the statutory provisions which relate to maintenance and accumulation of surplus income, shall apply, but when an infant marries**[F5 , or forms a civil partnership,]** such infant shall be entitled to give valid receipts for the income of the infant’s share or interest;

So the RAT would appear to apply?

Mark Woolley

Price Bailey

17

ITA 2007 s.479 will not in fact apply (ie trust rate inapplicable) if the income of the trust is not that of the trustee but another person [ITA 2007 s.480(3)(a)].

Where the beneficiary has a vested interest the income will be his and thus the trust rate will not apply even where the income is accumulated

However, where the interest is contingent the income is not his as and when it arises.

HMRC comment in IHTM para 16068:
“S.31 Trustee Act, including s.31 (2), contains provisions which are essentially administrative in nature rather than dispositive. The trustees’ discretion in relation to an absolute trust is limited to deciding how much income they spend for the benefit of the beneficiary and how much they retain on the beneficiaries behalf.
The express trusts in such a case will remain for the minor beneficiary absolutely - that is, the beneficiary has an immediate and absolute right to both capital and income, and only their minority will prevent them for requiring the trustees to convey the trust property to them. Any accumulations will be held for the beneficiary if they attain 18 or (by virtue of the original gift, not s.31 Trustee Act) for their estate if they die under that age. The trust property will form part of the beneficiary’s estate for IHT purposes.
As a result, a lifetime gift on trust for a minor absolutely, whether or not the provisions of s.31 Trustee Act are excluded, is a potentially exempt transfer”.

Malcolm Finney

18

Simon

I don’t follow this: “as if the infant dies before attaining 18, any accumulations of income will belong to his estate, notwithstanding that the capital will not.”

Surely if a minor has a contingent interest vesting at 18 and dies before that, they have not fulfilled the requirements of 31(2)(i) and so the accumulated income does not accrue to them or their estate under that provision. The accumulations would pass with the capital to the reversionary beneficiary under 2(ii).

That is the difference between a contingent interest and a bare trust.

Or have I missed something?

Andrew Goodman
Osborne Clarke LLP

19

I note that Lewin on Trusts (19th Edition) @31-003 states:

“Section 31 has great significance in tax law, for in cases where the section applies, a minor beneficiary does not have a beneficial interest in possession in the trust property, even though his interest is vested (Stanley v. IRC [1944] K.B. 255).”

If a minor does not have a beneficial interest in possession, they have no right to the income as it arises. Accordingly, is it not then subject to RAT?

Paul Saunders

20

It is I think extremely rare for Paul and Simon (two significant contributors to the TDF) to apparently disagree in their responses to questions raised by contributors. I’m sure many of those who raise questions are extremely comforted when Paul and Simon agree.

But what if they don’t?

I’m struggling as to who of the two is correct. Claire thanked contributors for their response but I’m not sure what she decided was the “correct” answer to her original query.

For what it’s worth and having thought about the matter since I originally posted an attempted response my thoughts are as follows.

Where a beneficiary’s interest in income is a contingent interest (as is, I understand, the case for a minor residuary beneficiary under a statutory trust on intestacy) any income arising is not his income as it arises (assuming income not paid to beneficiary) and thus belongs to the trustees. Hence, the trust rate applies.

However, where a minor has an absolute entitlement to capital the income is his and the trust rate will not apply.

TSEM 1568 assumes the beneficiary’s income is indefeasible.

Income of a bare trust (ie where a beneficiary has an absolute entitlement to both capital and income; ie not subject to a contingency) is not subject to the trust rate.

Malcolm Finney