I have a client who has lost his wife and the Will leaves assets to him in a FLIT. He does not want to receive the income at the moment and I am unsure how this would be treated for income tax. I understand if income is paid to him as the life tenant the Trustees pay basic rate tax and then he declares this income on his own tax return and would pay any further tax due.
What happens if the income is retained in the Trust and not paid out? As the Trustees have used their discretion does this then follow discretionary tax rules? Does the same apply for capital payments out to the children does this then move it into the relevant property regime or are these just PETs from the life tenant?
Does it split the trust into a mixed trust?
KMG Independent Ltd
If he has a life interest then the income is his whether or not it is paid out.
I would be surprised if the trustees currently have a discretion to accumulate given it is described as a FLIT. If they could accumulate, it would not be a life interest.
To avoid this (to accumulate or pay out income to others), the trustees would need to appoint away from him. Bear in mind that any appointment onto other trusts (i.e. anything other than an absolute distribution to one or more beneficiaries) would constitute a deemed chargeable transfer by him.
Osborne Clarke LLP
Regardless of whether the income is paid to him, or merely retained by the trustees, the widower has an absolute right to that income and must declare it appropriately.
However, should the trustees exercise their powers under the will to deprive him of the income, whether the whole or part, to the extent that it is no longer subject to an IPDI the trust fund will fall into the IHT relevant property regime. The separate “pots” within the trust will then be subject to different IHT regimes.
Any capital payments made out of the fund subject to the widower’s IPDI will not, in themselves, cause the fund to move into the IHT relevant property regime.