To summarise, I believe what you are suggesting is;
The Trustees have discretionary powers to pay income and accumulate under 31(2). This would suggest the beneficiary has no right to income (confirmed by the solicitor) and it would follow that the RAT to Trusts would therefore apply. However, you had stated TSEM1568, where HMRC states that ‘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’. Presumably as the beneficiary has received all of the Trust income/had it all applied for his benefit, you are suggesting that HMRC would regard this as an indefeasible right?
I must admit I haven’t come across this before, but the definition of the word describes such a right as not subject to being lost, annulled or overturned. I cant see how this is the case; this isn’t a bare trust, the Trustees have discretion. Whilst they do distribute the income they have the power to change this at any time.
Whilst I have been one of those posting on this topic, mindful that the particular case which gave rise to this chain occurs on a regular basis I am surprised that there is none of us has identified published guidance addressing the point.
Even the reference from Lewin I posted does not seem to be considered definitive.
Is the issue of the taxation of statutory trusts so basic that the text books, etc. just gloss over it?
I would be interested to learn of the views of contributors who specialise in tax.
Yes but the same logic applies to the statutory trusts-accumulations belong to the minor, so the trust rate should not apply.
If Claire is still uncomfortable with my point of view, simply advance the contingent entitlement under s32 Trustee Act on bare trusts, so there will be no doubt.
s31(2) states, “during the infancy of any such person…the trustees shall accumulate all the residue of that income…and shall hold such accumulations as follows…” if any such person attains the age of 18…and his interest in such income…is a vested
income" in relation to bare trusts, and then “or on attaining 18…becomes entitled to the property from which such income arose…….” “the trustees shall hold the accumulations in trust for such person absolutely”
Therefore both situations are worded in the same way, ie bare trust "if any such person attains the age of 18 " and contingent
on attaining 18 “or on attaining 18…becomes entitled to the property from which such income arose”, the
trustees shall hold the accumulations in trust for such person absolutely . I consider on the wording it is arguable that it is not necessary for the infant in either case to reach18 for the accumulations to belong to the infant at all times, so if the
infant dies the accumulations will be part of his estate.
I have always found s31 hard, as indeed I believe do most other people who do not have better things to do with their time than read it. However, as I am convincing no-one, as I said in a separate post today, simply advance on bare trusts to clarify, thereby
avoiding the unnecessary payment of RAT and tax returns.
I would love it if the s31 expert, professor Lesley King, could let us know what she thinks!
As I have said in another email which has not yet appeared, take the matter beyond doubt by an advance under s32 on bare trusts! It is a nonsense to be paying RAT in these circumstances and all the expenses that involves.
I believe there is some delay in my messages showing due to my contribution ‘status’. Apologies, I am keeping up!
My understanding had always been that where a legal right to income didn’t exist, and therefore where the Trustees were able to exercise any discretion over the accumulation or distribution over that income then the income arising within the trust would be subject to RAT.
I questioned this as we received advise from a solicitor suggesting that this was not the case, and even though the beneficiary’s right over the trust income and capital was contingent on them attaining 18, the income should be taxed as if arising directly to him. This was contrary to the advice they had given on the original creation of the Trust, where they had original advised that, as there was no right to income the RAT would apply.
To me, from my reading of responses, the uncertainty appears to surround whether the beneficiary has a right to income. If there is no right to income, my understanding would remain that the RAT would apply.
Whilst I agree with what I believe Simon is saying - that it can be nonsense in some cases to pay RAT and the costs of calculating that tax – even in low value cases there can be good reasons to maintain the statutory trust and not to adopt the suggestion to advance the trust fund onto bare trusts for the minor.
An alternative strategy might be to invest in low/non income producing assets, geared towards capital growth. Having said that, in the past National Savings Certificates have been a popular investment. However, in view of the absence of capital growth, their suitability is probably less widespread.
As I have explained, I believe that on the wording of s31 it is possible to argue that RAT does not apply, as suggested by Claire’s solicitor. The income belongs to the infant as all accumulations belong to him, but cannot be paid over as he is a minor. The same would apply if he had a life interest-under s31 income would have to be accumulated, but it is the infant’s income and the accumulations are his, and I would not consider RAT should apply in those circumstances either.
The same applies to a bare trust-under s31 the trustees have to accumulate income, but it is not subject to RAT because the accumulations belong to the infant.
There is no IIP for IHT, as pointed out by Paul, but that is because there is no immediate right to actually be paid the income, as the infant is a minor, and the minor does not own the capital. However the bare trust is different, as the infant owns the capital, so it is part of his estate for IHT.
As I have said, I have always found s31 difficult, so I may well be wrong, but to resolve the situation and avoid any doubt about RAT, make an advance under s32 on bare trusts.
In the light of Simon’s wish to know Professor Lesley King’s thoughts, I put the question to her – referring her to the thread.
She kindly responded as follows:
A minor with a vested interest is only certain of getting accumulations if they reach 18. If they die below that age the accumulations stay added to capital. Hence although they appear to be entitled to income under the terms of the trust, the effect of s31 is to turn their interest into one which is contingent on reaching 18. That’s why it’s important to vary s31 if you want to give a minor an IPDI.
S31(2) is divided into two parts : s31 (2)(i) deals with minors with vested interests who reach 18 and those with interests contingent on reaching 18 (or earlier marriage/cp). Under s31(2)(i) minors get the accumulations, if and only if, they reach 18 (or marry/form cp). If you want to give a minor an IPDI you have to vary this so that the accumulated income is held for the minor absolutely.
S31(2)(ii) says that in any other case the accumulations are added to capital. So if a minor with an interest in a bare trust (popular at the moment), dies under 18 the accumulations pass with the capital. The capital and accumulations are part of the minor’s IHT estate.
Thanks for that Paul-I knew she would be able to put me right!
So the best way out of this is a bare trust. I have never had a situation where a testator who is happy for a child to take at 18 would opt for a contingency at 18, with all the added costs and complications this gives rise to. So unless the situation is most
unusual, I suggest the trustees consider this.