Hi Diana
I agree that the investment of the income should not automatically cause it to become capital, although believe that there was a case a few years ago where the court held otherwise, and one before that where the court held that the trustees needed to formally resolve to accumulate if the income were to be capitalised. HMRC has taken a middle course with the inclusion of income which remains undistributed for 5 years or more being caught in the IHT periodic charge. I understand that whether or not income has actually been accumulated by being invested is probably still an open question.
In the present instance, that the trustees are holding undistributed income means they could satisfy the distribution immediately upon making the resolution should they so wish. I therefore think it may be difficult to successfully argue that for income tax purposes the distribution is due at the date of payment, rather than when the resolution was made, unless there is anything within the resolution which suggests payment will be made at a later date.
If the trustees intend that for income tax purposes the distribution should be made in the current tax year, regardless of the date of payment, provided that the resolution does not indicate any deferral of payment I suggest that is the position that currently exists. Should the resolution refer to the payments being made only once cash is available, investments could be realised in good time to enable the distributions to be made in the current tax year. Had there been no undistributed income, I would not have revised my analysis.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals