A&M Trust turning to IIP - income tax position of payments post change

If an accumulation trust provides that all income can be paid to or used for the education, benefit or maintenance of a beneficiary up until that beneficiary becomes a certain age then any income arising in that period is subject to the rate applicable to trusts.

The trust deed further provides that at a certain age the beneficiary becomes entitled to a life interest in the income.

Over the life of the trust much income has been received and tax at the appropriate rate paid over. This tax has gone into the Tax Pool. No income was used or paid for the beneficiary’s benefit during that period. Therefore, there is a significant Tax Pool figure as at the date of the beneficiary acquiring their life interest.

Following that date the Trustees decided to make significant payments to the beneficiary. These payments were made from the one Trust bank account into which all income had been paid and all expenses, including tax, had been paid out of.

The Trust deed also provides that on attaining the specified age the beneficiary not only becomes entitled to income on an ongoing basis but also any accumulated income.

My question is what is the nature of the large payments to the beneficiary in terms of income tax?

My understanding is that as the Trustees no longer have discretion over the income of the Trust then the Tax Pool, in effect, falls away and so no tax credit can be attached to the payments made to the beneficiary. Is that correct?

Has the accumulated income turned into capital or does it still retain its nature as income for income tax purposes and if it does how does the beneficiary declare this on their Self Assessment Tax Return and is there any tax credit to be included.

If the accumulated income has become capital I assume we will need to consider whether an IHT100 needs to be completed and if any IHT is payable. Is that correct?

Robert Fearon
Robert Fearon & Co

I am always reluctant to see taxed income turn into capital, especially so where a Trust has kept records and can produce Trust Accounts that show accumulated income, even if it is over a period of years. I would instead (if this were my case) treat the large payment, which in my view is quite possibly accumulated income, AS income and let the beneficiary declare it as income.

From your description of the circumstances it sounds as though the trustees did indeed exercise their discretion when they decided to make payments to the beneficiary.

Julian Cohen

Thank you Julian.

It appears from what I am told (I have not been acting previously) that no Trus Accounts have been kept and only tax returns have been submitted.

If we do argue that the payments are from accumulated income are you saying that the beneficiary still obtains the benefit of the 45% tax credit from the tax pool notwithstanding the fact that the trustees did not, at the time they made the payment, have discretion to do so as the trust had turned into a life interest trust?

Robert Fearon
Robert Fearon & Co

You need to look at s687 ICTA 1988 – payments made at the discretion of the Trustees are deemed to be made net of tax at the Rate Applicable to Trusts. If the payment is because the beneficiary is entitled to the income (if indeed it has retained its character as such) then only BRT can be certified.

Graeme Lindop
Coles Miller Solicitors LLP

The trustees’ discretionary power to distribute income will survive the beneficiary reaching the necessary age in relation to income that arose prior to that birthday. If then distributed, the beneficiary would receive the tax credit (it may of course be necessary for the trustees to pay additional tax in relation to dividend income to ensure that the tax pool carries sufficient credit).

The only issue appears to be whether the income was accumulated - unfortunately this may not be clear and it is a case of looking at the facts in the round. If the income has sat untouched in an income account then there must be a good argument that it remains unaccumulated - similarly if it has been invested then that indicates an intention to accumulate and it may now constitute capital. HMRC set out a loose view in IHTM42224:

The trustees have a reasonable period in which to consider what to do with the income, and this period depends on the facts of the case. Refer to Re Gulbenkian’s Settlement Trusts No.2 [1970] Ch 408

There may be more detail in their trusts manual.

Andrew Goodman
Osborne Clarke

Thank you Graham. I have read S687 (now S493 ITA 2007 etc)

As a non lawyer, I suppose my questions are really:

  1. How can I be sure that the previously non distributed inomce that was subject to the RAT has remained as “income” for this purpose given there are no Trustee Minutes, Trust Accounts or any other documenation to support this. The excess income after expenses has just sat in a Trust bank account.

  2. As the Trust Deed says that the beneficiary becomes entitled to any accumulated income at a specified age are the Trustees exercising their discretion at that point or are they just acting in accordance with the terms of the Trust, albeit there seems to have been quite a delay between the beneficiary attaining the specified age and the Trustees actually making any payments at all to him/her? The payment so made have been significant in value i.e. one payment in excess of £100K.

If they are not exercising their discretion is the tax pool still available? I believe not or are you saying that it is to the extent of basic rate tax on the income received? Where is this in the legislation?

As the accumulaed income comprises rental income, bank interest and dividend income would it therefore be necessary to analyse the income payment into the savings, non savings and dividend rates and then prepare an R185 based on that analysis? I cannot just complete the Discretionary Trust payments section as otherwise the RAT tax credit will be given/assumed.

I am sure this issue must have been a common one when A&M Trusts were still in play (pre 22 March 2006) but for the life of me cannot remember what happended to accumulated inomce that had not been paid out at the point when the beneficiary either took a life interest or took absolutely. Was it just treated as an accretion to capital and so had no inocme tax ramifications or was it necessary to provide a R185 showing the income payment at that point and if so was this with the benefit of the RAT tax credit or just with the basic rate tax credit you mention?

Robert Fearon
Robert Fearon & Co


I think it might be helpful if you provided [redacting names] the exact
wording used in the relevant clauses i.e. income
discretion/payment/entitlement and accumulation provisions as it seems to
me that these could materially affect the position. Also If there is more
than one trust beneficiary this can have an effect as can whether or not
separate funds for different trust beneficiaries should have and have been

If no accounts have been prepared and the income retention
position/available tax pool position was not considered before the income
entitlement arose then I seriously wonder whether the trustees have met
their responsibilities.

Unfortunately in my experience too many situations similar to the one you
describe occur and often actions are taken, not just by lay trustees, that
are incorrect both from a tax compliance and trust law perspective.

Furthermore in my experience income which has not been distributed at the
discretion of trustees is often incorrectly described.

As I see the position there is a material difference between two distinct
types of undistributed income:

[A] Retained income


[B] Accumulated income

which, for accounting purposes, I consider should be clearly kept separate

In the case of [A] no discretionary distribution action will have been
taken by the trustees and no accumulation will have taken place.

Depending on the trust provisions income can be accumulated in a number of
ways - The trustees can have a specific power to accumulate which should
be exercised when appropriate or there can be a default accumulation if the
trustees have not exercised their discretion to distribute. .

HMRC do not appear to like the decision in Re Gulbenkian’s Settlement Trust
No 2 and have also been known to contend that there has been a de facto
accumulation if the funds in the retained income account are used to
purchase investments or indeed if income monies have been moved from a
current account to a separate deposit/interest bearing account!

Andrew M Mortimer

Thank you for your replies.

As suggested by Andrew I have reproduced the wording of the relevenat clauses below:

"2 (a) Subjet as provided in sub clauses © and (d) of this clause the Trustees shall hold the inocme of the Trust Fund upon trust until the Beneficiary shall attain the age of Twenty five years or die unde that age to pay or apply the whole or such part if any as the Trutees may in their absolute discretion think fit of the income of the Trust Fund for or towards his maintenance education or benefit and (during so much of the period of twenty one years from the date hereof [March 1989 inserted by RF for info only and does not appear in clause] as the Beneficiary shall be under the age of Twenty five years) to accumulate the surplus (if any) of such income at compound interest by investing the same and the resulting income thereof in any investments hereinafter authorised and to hold the same as an accretion to and as part of the Trust Fund for all purposes and so that the Trustees may in their absolute discretion pay all or any part of such income directly to the Beneficiary after he shall have attained the age of eighteen years.
(b) Subject to the aforesaid and as provided in sub clauses © and (d) of this clause -
(i) the Trustees shall hold the income of the Trust Fund upon the statutory protective trusts for the benefit of the Beneficiary for the period of his life
(ii)… Left out as I do not think it is relevant.
© This clause enables the Trustees to appoint the funds to another Trust as they think fit. [This is RF’s simplified version of what the clause says.]
(d) This clause enables the Trustees to advance the capital to the Beneficiary in whole or in part as they think fit.[This is RF’s simplified version of the clause]
(e) This clause enabes the Trustees to hold the funds for the children of the Beneficiary.
There are then further long stop clauses if the Beneficiary has no children.

Does all of the above mean that the tax pool is available to frank any payments to the Beneficiary after his attained a right to income at the RAT or at the basic rate only. If it is the latter, under what legislation is this the case.

Has it turned into capital?

Robert Fearon
Robert Fearon & Co

The Accumulation Period expired in March 2010. Prior to that, the Trustees had a duty to accumulate any income not released at their discretion. Accumulations must be added to Capital and will pass, ultimately, to the default beneficiaries.

The big question then is what are the beneficial interests in the income post March 2010? Do the Trustees’ discretionary powers over income allow them to pay the income to anyone other than the Beneficiary? If not, then the Beneficiary will be entitled to the income and the “discretion” the Trustees have will only be about timing of payments. If that is the case, then RAT tax would not apply after March 2010 and all the income since March 2010 can be paid to the Beneficiary.

Graeme Lindop
Coles Miller Solicitors LLP

Thank you Graham.

As far as I can see the default position and therefore, I assume, ability to make payment to other potential beneficiaries only comes into play if the Beneficiary does not reach the specified age, which he has or he dies subsequently, which he has not yet.

Does this resolve the point or am I missing something?

Assuming only the Beneficiary can take income post 2010 then you seem to be saying that the RAT will no longer apply and that the income post March 2010 can be paid to the Beneficiary.

Is that income with a basic rate tax credit or is it actually capital?

I understand from speaking to the other advisers involved that no Deeds of Appointment of Capital have been made in respect of the large paymetns that have already been made to the Beneficiary.

I suppose that you could view this in one of two ways; either, it is not a payment of capital as it is income, or as I suspect, no advice was taken from his lawyer at the time when the Trustee made the payment and so no formal documentation was prepared and so this does not mean it was not capital.

I assume that it could be argued, although I accept that ideally we would have contemporaneous documentation to support the view, that the large payment to the Beneficiary were capital (as described in your first paragraph) and are being made by virtue of clause 2 (d) as mentioned in my earlier post.

Robert Fearon
Robert Fearon & Co


I note you ‘inherited’ this trust. Somewhat unfortunately, depending upon
what or what has not already been appreciated and acted on, by the trustees
or their previous advisers, for tax purposes there would appear, in
addition to resolving the income tax position, a need to also possibly
carefully consider the IHT ramifications.

Depending upon the amounts ‘at risk’ it might therefore be worthwhile
additionally engaging a trust tax specialist.

When I was employed and since I retired and took on part time consultancy
work I have worryingly come across this type of situation and need for
specialist advice far too often.

If my understanding of the position is correct then:

· It would appear that this trust was initially an inter vivos
inheritance tax A & M settlement set up in March 1989 with one primary

· Whilst the date of birth of the primary beneficiary is unknown it
would appear they are now over age 25 and had attained age 18 by 22 March

I tend to agree with Graeme that the trustees’ power to accumulate income
ceased 21 years from the date of the settlement deed.

In addition it looks like the trustees power to decide if and when to make
discretionary income payments and the quantum thereof may have ceased when
the beneficiary attained age 25 and the protective life interest commenced
with a resulting interest in possession for income tax purposes only

As no discretionary income payments appear to have been made before the
beneficiary attained age 25 I consider that the position up to 21 years
from the date of the settlement deed [X] and from then up to when the
beneficiary reached age 25 [Y] need to be considered separately.

From Y all the trust income [as long as a divesting act has not occurred]
belongs to the beneficiary and has to be declared on their personal tax
return irrespective of when the income is paid to them.

I consider all the undistributed income received up to X has been
accumulated and added to the trust capital in accordance with the terms of
the trust deed.

From what you have said the trustees appear to have the power to make
capital payments to the beneficiary. Whether capital payments have to be
made via a trust deed or the trustees can just resolve to make a payment
depends upon the precise terms of the settlement deed. Assuming there is no
requirement for either (i) a trust deed or (ii) written trustees resolution
a verbal will suffice but I would still recommend that written resolutions
are prepared.

The question that arises is what is the position both from a trust law and
tax law perspective with regard to the income received between X & Y. It
could be argued that as there is no valid power to accumulate income and
that the primary beneficiary is over age 18 that they had an income
interest in possession with the result that it should be paid over to the
beneficiary and Chapters 3 to 7 of ITA 2007 do not apply.

From an IHT perspective it appears that whilst the settlement was initially
within the s71 IHTA 1984 A & M settlement provisions following the IHT
changes introduced in the 2006 Finance Act that ceased to be the case on 6
April 2008 when the settlement became a s58 IHTA 1984 relevant property

If this is the case any capital distributions will be chargeable to IHT
under s65 IHTA 1984 and a section 64 IHTA 1984 ten-year anniversary charge
will have arisen in March 2009 with the next such charge arising in March

Andrew M Mortimer

Thank you Andrew for the detailed response.

It would appear that the Trust has always been dealt with as a Relevant Property Trust as 10 Year Anniversary Charges have been calcultaed and IHT100s submitted.

The Beneficiary became 18 in 2007.

As I feared, if the accumulated income has become captal, then the amounts paid out in lump sums will be potenitally subject to IHT as you describe.

I think you are suggesting, and it was my thought from the very start, that the tax pool “died” when the Beneficiary attained his life interest and because no discretionay income payments were made before that date any income paid following that cannot benefit from the RAT tax credit.

Please let me know if my summary above is not correct or in accordance with your view.

Robert Fearon
Robert Fearon & Co

Do members have any further thougthts/clarification following my last post?

Thank you all for your continued help.

Robert Fearon
Robert Fearon & Co

I think in principle your thoughts are correct.
The tax pool may not have died immediately on the attainment of an interest in possession, if the trustees had decided to exercise their discretion shortly thereafter, but it would have expired fairly soon afterwards.
Maxine Higgins
Citroen Wells

When administering A & M trusts on a regular basis years ago, the view was that the tax pool died on attainment of the capital vesting/interest in possession age, so you had to consider making distributions before that date to use it.

This is different from a similar current situation, where you have a discretionary trust and decide to grant a revocable life interest. The income held prior to creation will still be held on a discretionary basis and can be distributed under discretion to use the tax pool thereafter.

Simon Northcott