End of accumulation period

It is nearly twenty one years since the testator’s death and the commencement of a will trust for her [mentally] disabled daughter.

The trustees have power to accumulate for 21 years in their absolute discretion (having special regard to the daughter’s needs).

After 21 years, the trustees have power, ‘to pay as my Trustees may in their absolute DISCRETION think fit’ any income which arises and which is not paid or applied for the benefit of her daughter to a specified charity…

Will the trustees still have a power to accumulate or are they obliged to distribute the income, either to the daughter or the charity?

Kevin Preston
Amherst & Shapland Limited

Once the accumulation period has expired, the trustees have no power to accumulate. To the extent that the trustees do not exercise their discretion to distribute the income to the daughter or the specified charity, it may fall to be distributable to the default beneficiary(s). The default beneficiary(s) will effectively have a life interest in the trust fund, subject to the trustees’ discretion in favour of the daughter and specified charity.

If the default gift is to any charity of the trustees’ choosing, the trustees could retain as “undistributed income”, although such action may well be open to challenge as being contrary to the intentions of the settlor (as expressed within the trust instrument).

There are various forms in which the default gift may be couched, and it is important to consider each such gift separately in order to be certain as to the rights they create in any income not applied under the trustees’ discretion following expiry of the specified accumulation period.

Paul Saunders

Once the accumulation period has ended the trustees can no longer
accumulate income.

Instead it has to be distributed to one or other of the discretionary
beneficiaries within a reasonable period of time - see Re Gulbenkian’s
Settlement Trusts No 2

If at present there is undistributed income which the trustees would rather
accumulate instead of distributing at a later date then I would suggest
that consideration is given to drawing up a trustees resolution whereby all
undistributed income as at the day before the 21 years ends is accumulated.
The actual calculations of (i) this amount/transfer to capital and (ii)
post end of accumulation period income does not have to be done then.
Instead if you prefer it can be done when the trust accounts are prepared.
By making such a resolution the trustees are ‘drawing a line’ as at the end
of he accumulation period.

Andrew M Mortimer

It must be distributed or applied, eg buy things for the daughter. If that is a problem go for low income investments

Simon Northcott

An interest in possession will arise at law on the 21st anniversary. That is the law relating to permitted perpetuities and accumulations and is unavoidable.

I suspect you will have answered this already; if there is no disabled persons’ trust is there a power to vary the provisions of the trust to a form of disabled persons interest which is not relevant property and therefore not subject to the 10 year charge?

It might then be possible to use the ethical discretion indirectly, aptly, and not be forced to pay out income to either her or the charity as it arises but to hold it in a separate account declared to be hers not as an accumulation, preferably not to her order but rather that of a carer in charge. Others will doubtless have a point to make on that possible pragmatic solution.

The income has to be paid “out of the trust” mechanism at some point within a reasonable period, but that does not mean it cannot be held by the Trustees separately on bare trusts. That is no longer a fiscal issue since the relevant property modifications which would appear to impose a 10 year charge were it not already a disabled persons trust, or you don’t vary the provisions into a disabled persons trust.

Is there some form of protection mechanism outside the trust , or do the trustees assure that responsibility?

Holding it on account, income tax paid for her, for the now adult child might be one method depending upon the circumstances and the degree of disability.

Peter Harris


Following on to my previous posting I agree that careful consideration
needs to be given to the exact wording used in the Will trust.

Unfortunately, in my experience, nuances are often overlooked or not
appreciated and this can result in incorrect treatment.

However, I doubt that for income tax purposes an interest in possession
will arise.

My understanding is that HMRC consider no income tax interest in possession
exists and therefore all the trust income fall to be charged under Chapter
3 ITA 2007 where:

(i) a valid power or direction to accumulate exists.

(ii) trustees have a discretion over to whom to pay income to or when to
pay income out.

(iii) income is to be paid to a named beneficiary [or named/class of
beneficiaries in prescribed shares] if the discretion over the payment of
income within a prescribed time has not been exercised.

HMRC considering [iii] to effectively be the result of exercising a
‘negative discretion’.

Andrew M Mortimer

I am overwhelmed at the responses being made so quickly, all consistent in response to the question but each adding constructive suggestions. Thank you.

Kevin Preston
Amherst & Shapland Limited

HMRC have accepted that, for IHT purposes, there is a deemed interest in possession so that 10 year anniversay charges do not arise.
I agree with Andrew that for income tax purposes the tax rate for trusts will be apply.
I wonder, however, whether the trust will still be eligible for Vulnerable Beneficiary Relief as there will be more than one benficiary?

Kevin Preston
Amherst & Shapland Limited