Hi Diana
s.493 ITA 2007 refers to the tax year in which the trustees make an annual payment in the exercise of their discretion.
s. 684 ITTOIA 2005 refers to tax being charged on the full amount of the annual payments arising in the tax year.
Both refer to “payment”.
HMRC refers to the date of payment being when the beneficiary is legally entitled to require the trustees to pay over the income.
In the case you have raised, you state the trustees have no income in the tax year in which the resolution was made, but will have the cash to make the payment in the following (?) tax year. This being the case, does the beneficiary have an immediately enforceable claim against the trustees? In their consideration, the trustees will have been aware of the fact that immediate payment could not be made and no doubt they would have taken that into account although, reading between the lines, perhaps it was implicit rather than explicit when they resolved to make the distribution.
If one strictly applies the HMRC reasoning, and trustees exercise their discretion to pay to a beneficiary all of the next 12 months income of the trust, it seems to me that (for income tax purposes) the whole year’s income will it be deemed to have been received by the beneficiary when the resolution was made, whereas I believe it will be treated as being received by the beneficiary as each dividend, etc. is paid?
Whilst I agree that the HMRC interpretation is that the distribution is taxed upon the beneficiary when they are “legally entitled to require the trustees to pay over the income”, it seems to me that the beneficiary can only enforce such right when the trustees have the income to be paid over (as identified in the scenario immediately above).
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals