We are dealing with a pre-2006 life interest trust where the life tenant died in 2021. Unfortunately the trust deed does not disapply the Apportionment Act 1870, and HMRC would not agree to proceed on an alternative sensible basis, so it has been necessary to prepare apportionment calculations.
We have now ascertained that post-death income of [X] is apportionable to the pre-death period, and will be due to the deceased’s estate.
Should the apportionable income be included in the trust’s final tax return for this period, or should it simply be paid over gross to the deceased’s estate?
We think it should probably not be included in the trust tax return, on the basis that apportioned income arose after the death of the life tenant and at a time when the trust had effectively come to an end. However we are struggling to find guidance on the point.
It is many years since I last had to deal with apportioned income but I have a vague recollection that the amount of apportioned income forming an asset of the estate of the deceased life tenant also constitutes a debt in the valuation of the trust fund as at the date of the life tenant’s death. From an IHT point of view that merely shifts some IHT into the estate and away from the trust fund.
From an income tax perspective, the income is taxable when received and if that is after the life tenant’s death then the treatment will depend on whether or not the trust came to an end on the death. If so, the trustees are receiving it as bare trustees and are not taxable on the income and do not need to do a tax return covering that period. If not, then the trustees will be taxable on to and must pass it on to the PRs net of that tax.
Graeme Lindop Probate Consultant Coles Miller Solicitors LLP
Whilst HMRC may not be amenable to ignoring the point, the executors of the deceased life tenant and the trustees could agree to the adjustment being based upon the estimated apportionment without waiting for all dividends, etc. to be received. This will be a capital payment by the trustees, to the extent that it relates to estimated income not received, and HMRC have generally accepted the aggregate amount paid to the executors for IHT purposes.
I believe the topic was addressed quite thoroughly in Vickery: Law and Accounts of Executors, Administrators and Trustees, published in the late 60s, early 70s, if anyone happens to have a copy of their shelf the content of which they might share?
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
Thank you both.
The trust came to an end on the life tenant’s death, so as you say there was no trust in existence when the income was received. I therefore follow Graeme’s analysis. We will include a note on the final tax return that we have treated the apportionable income in this way. (And of course it will fall to be taxed at basic rate in any case, whether in the trust or the estate).
Paul, thank you also for your second point which we will consider. We are in contact with somebody from HMRC Technical regarding the apportionments, but so far they have not been very pragmatic. We have done most of the calculations now, but still awaiting a few late dividends so anything that enables the parties to draw a line under this will be potentially worth pursuing.
A brief follow up question if I may, am I correct that income apportioned to the pre-death period will be taxable in the hands of the executors, and will be reported in the estate tax returns, rather than the life tenant’s final lifetime tax return (which the executors are currently finalising)?
I have to say, we had thought this income would be taxable on the life tenant, but Graeme is of course correct to say that income is taxable when received.
