Accumulation period ends - ten year charge

I am struggling to understand how a ten year charge can be paid when accumulation period has ended.
For example: accumulation period ends after say 11 years.
Property/land held with a small rental generated each year.
In year 20 the TYC is say £20K. The bank has nothing in it as the rental income has all been distributed as accumulation period ended.
So how is the liability paid?

On the other hand I do have a trust with a large bank balance (£120K), rental of about £30K a year net, and accum period just ended. The TYC will be about £80K in 8 years.
Can the income be used to pay the TYC in 8 years time?

thanks.

Trustees can and do pay IHT charges on RPTs out of income. The low rates of IHT often make the tax less than ten years of undistributed income net of income tax. S64(1A) is a nuisance. It makes some undistributed and unaccumulated income chargeable at a TYA but the tax cannot be paid before the event, so it would add to the amount then charged. The liability to tax is not deductible as it has not arisen (like prospective CGT on a future sale) If as is likely the income has suffered tax at 45%, which has gone into the pool, such a payment will waste the credit, assuming a distribution of it would have been taxed on the recipient at a lower rate.

It remains income for trust law but cannot be distributed once spent. The trustees of a DT will not usually have to worry about compensating income for what is arguably a cost to capital. Of course the contrary argument is that the IHT under s64(1A) is chargeable to capital. Most DTs do not have separate classes of income and capital beneficiaries but some RPTs are life interest trusts with a NQIIP.

The trustees have an obligation to fund any IHT prospectively payable; ideally the settlor will have given some thought to the potential problem e.g. by settling some liquid funds. If the trust fund income will not defray the cost then the trustees can look at borrowing, commercially or from the settlor or a beneficiary or friend of the latter. A loan from the settlor spouse or civil partner repayable on demand will not be a TOV so not an addition under s67. There is an outlet under s67(2) but arguably the loan will not add value as it merely replaces the liability of an existing debt to HMRC. A fixed term loan not at market interest will add value so the 5% disregard might then help.

Richard is right to warn of the risk to trustees of a demand loan where the trust cannot easily repay; the trustees will be in some difficulty if a demand is ever made e.g by the lender’s PRs or legatee. Forgiving the loan will be a TOV and addition subject to 5%. This may not cause a revision to the settlor’s cumulation on the facts and may attract the annual exemption. The snag is s633 ITTOIA if the loan is ever repaid as regards subsequently arising trust income; strictly it does not matter that the loan was on commercial terms. The settlor etc. has no statutory right to recover tax charged on him.

HMRC do indeed argue that a gift need not be a TOV for GROB purposes so a non-commercial loan is theoretically a problem, but as the loan monies are disbursed they do not create derived property for a GROB to subsist in.

Other lenders must in theory beware of becoming joint settlors for income tax and IHT but as the loan monies will be spent it is hard to see how income can arise from them to be taxed on a beneficiary-lender-settlor or a GROB as there is no settled property derived from the loan. The trustees can secure the loan on any suitable trust assets. It will be deductible on a future TYA.

In the worst case scenario there is the instalment option for qualifying property (but with interest on the entire amount outstanding wrt land) and in the very worst case the sale of trust assets. HMRC will not care that a sale is not wanted or opportune as to timing but can be asked for time to pay:IHTM30159.

Jack Harper

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Thanks Jack.
My trust with the large TYC will have enough income to cover it, although I appreciate it means a tax pool “loss”.
And I take the point a loan can be taken out, and the income would repay this.
Forgive me but what is a TOV? (when you say it the penny will drop!).

A Transfer of Value. Interest paid on a loan would be deductible but only for the 45% special trust rate:TSEM8215 and 8220. The mechanics of this are truly labyrinthine: ss484-7 ITA 2007 and TSEM8240-60. Example at 8255. As expenses are deductible only if chargeable to income under general trust law, even if the trust instrument provides to the contrary, the TYA IHT bill itself is not deductible as it is chargeable to capital even if actually paid out of income:TSEM8220-35, especially 8235 last para.

HMRC are saying there that income tax on the trust income, obviously chargeable to income in trust law, is not deductible. This looks at first glance like an HMRC statement Ex Cathedra as one might reasonably have expected such an expense to have figured as disallowable within s484 like the exclusions in subsections (5) and (6). But the prescription of grossing up seems to achieve the outcome: example at 8240.

Contrast the position of an IIP owner’s income: 8340. Here the trust deed provisions are not disapplied and expenses chargeable to capital but paid out of income are deductible. The IIP owner is taxed at higher and additional rates on the gross equivalent of trust income net of trust expenses paid out of income and net of income tax itself:8345-50. “So, ‘allowable’ TMEs for an IIP beneficiary do not constitute a tax deduction or a tax relief, because they represent sums of money that the beneficiary was not entitled to in the first place”: this is HMRC’s sophistry in 8325 to explain what is a de facto deduction to anybody else. Clearly in a DT no one is going to ever be entitled to income paid away in expenses that do not however reduce the trustees’ taxable income and ultimately that of beneficiaries when distributed.

This can result in less tax, especially where expenses are paid from capital. Appointing a revocable IIP from a RPT, and revoking it, has no IHT or CGT consequences and may reduce income tax if done before the income arises. This is often a good strategy with RPTs if a suitable beneficiary or several can be identified to make good use of the income and possible repayments of tax paid by the trustees

Jack Harper

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