A will provides for a discretionary trust of residue. In order to claim IHT spouse exemption, an appointment of a life interest in favour of the spouse is made. Can/should the deed specify that the spouse is to be entitled to all income from the date of death rather than from the date of the appointment? If so, will the spouse be solely responsible for the payment of income tax from the date of death or just from the date of the appointment?
Geraldine Craig
Tanners Solicitors LLP
The following is I believe the situation.
The executors administer the estate, and then assent the residue to the trustees, including any income.
The trustees receive a 185 income statement from the executors, and assuming they receive the income after the deed appointing the life interest, it is treated as income of the trust received when there was a life interest and will not be subject to anything
more than basic rate income, which has already been paid by the executors. The trustees then give the life tenant a Trustees 185 so that the life tenant can declare the net income herself.
Simon Northcott
Thank you so much Simon – much appreciated!
Geraldine Craig
Tanners Solicitors LLP
There are no back-dating provisions which have effect for income tax purposes.
Hence, any income arising to the discretionary trust prior to any appointment of the life interest is subject to income tax on the part of the trustees and on the part of a discretionary beneficiary if paid out thereto (with an attaching tax credit).
If the deed specified that income arising from the date of death was to belong to the life tenant any income tax charge on such income would not be that of the life tenant; only income arising on or after the date of the deed would be a liability of the life tenant.
Problems would presumably arise where income from the date of death was to be that of the life tenant if such income had in fact already been distributed to a discretionary beneficiary prior to the deed.
Malcolm Finney
I suspect no income would be paid to the trust until after the life interest appointment, in which case I believe the procedure I outlined should be followed.
Simon Northcott
Yes, I suggest the appointment of the life interest should specify that the entitlement includes the pre-appointment income, if it intended to mop up all of the income. If not, then the pre-appointment income may still be subject to the exercise of the trustees’ discretion.
Whilst, as Simon says, the executors will only be liable for basic rate tax on income they receive, the way it is taxed in the trustees’ hands will depend on whether distributions are made before or after the appointment.
When an executor makes any distribution, for income tax purposes it is deemed to include the estate income received up to that date. If the trustees have not appointed onto life interest trusts by then, the income element will be taxable in their hands at the trust rate, regardless of whether it is subsequently captured within the life tenant’s entitlement.
With any distribution after the date of the appointment, the income element will have been “franked” within the estate and any income tax adjustment will be reflected in the life tenant’s personal tax position.
Paul Saunders
Many thanks for your help Malcolm, which is very much appreciated.
Geraldine Craig
Tanners Solicitors LLP
Many thanks Paul – again, very much appreciated.
Geraldine Craig
Tanners Solicitors LLP