Accumulated income on winding up discretionary trust

A discretionary trust is being wound up following agreement of trustees & beneficiaries.
The income has accumulated over time rather than being paid out.
On winding up is the value of the beneficiaries accumulation account treated as income or capital for tax purposes when it is paid out in full?
If income can the trustees decide which beneficiary the income should be paid to when winding up the trust.

Sharon Kennelly Clipperton
Winn & Co

For income tax purposes where income of the trust has been formally accumulated payments made to beneficiaries are payments out of capital and thus no income tax charge arises on the part of the beneficiaries. This means that any income tax charge paid by the trustees on their income is irrecoverable on the part of a recipient beneficiary (even if the trust deed provides for accumulated income to be paid out as income).

Once accumulation of income has occurred presumably it qualifies as “relevant property” and hence subject to exit and periodic charges.

For IHT the rules were changed effective 6 April 2014 for periodic charges with respect to non-accumulated income [IHTA 1984 s. 64(1A)]. These changes have no application for non IHT purposes or IHT exit charges [IHTA 1984 s 65(5)(b)].

Malcolm Finney

Thank you. could you expand on what might indicate that the income has been formally accumulated - there has been no written decision.

Sharon Kennelly Clipperton
Winn & Co

Theoretically, an accumulation occurs when an irrevocable decision is taken by the trustees to accumulate although this may in practice be difficult to identify. Good practice is for the trustees to pass an explicit resolution effecting an accumulation.

The position re accumulations may be explicitly governed by the trust deed (eg if after X years income is not distributed then it is treated as having been accumulated).

The accounts may provide some relevant information.

One of the problems is that there may be a significant time after income has arisen which, despite the passage of time, may still be distributed which may mean income remains un-accumulated for some time. It is because of this that under FA 2014 (effective 6 April 2014) there is now a deemed accumulation, albeit for the IHT periodic charge, where income received more than 5 years before the anniversary which has not been distributed is deemed to have been accumulated.

Malcolm Finney

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If the income had been reinvested in equities, would this automatically mean that it was deemed to be accumulated and therefore transferred into capital?