We have recently terminated a s71A&M trust which was amended to fall within the 18-25 provisions. We are therefore completing an IHT100h.
There have been a number of formal accumulations of income in the trust.
The form IHT100h asks at G2 – ‘Did the settlor add assets to the trust after the trust began?’ to which the answer in our case is ‘no’.
(In contrast form IHT100c (for exit charges from a RPT) asks more widely worded questions which would presumably include income accumulations:
G2 – ‘Were any assets (relevant property) added later and before the date of this charge’ and G4 ‘did any non-relevant property added to the trust at anytime become relevant property before the date of the charge?’)
It would appear from this that income accumulations are not relevant in calculating an exit charge in an 18-25 trust, however I cannot see why this is necessarily the case? I can see that accumulations before the beneficiary was 18 should be left out of account (as this period is disregarded for IHT). However, in this trust s31 TA 1925 was disapplied and income was accumulated in the period when the beneficiary was aged 18-25.
I can find little guidance and certainly none in the HMRC notes for the IHT100h, so I am grateful for any comments. (Though if HMRC do not ask for information about accumulations, it is hard to see why we should provide it).
Surely the income has already become the property of one or more beneficiaries as it arose, given s.31 was disapplied, and so is no longer property comprised in the settlement for s.71F(9) or s.71G(2). This income was presumably charged to income tax on the beneficiary entitled to it. It could have been retained while the owner was a minor but not afterwards and not after the settlement is terminated even if during minority.
S71D can apply where B has a contingent interest in the income but by age 25 B must become entitled to the income as well as the capital and receive any distributions of income during minority, under s31 where it applies.
So the exit charge under s64 will not be imposed on trust capital but income will be liable to income tax. As such trusts do not suffer a 10 year charge s64(1A) will not deem income as capital and so the general law on that issue would apply; the qualifying conditions would permit trustees to accumulate income under a power to do so but only for the benefit of B if the settlement is to qualify. If they do so then the special charge will apply to it as capital. The only reason for doing so might be to avoid paying out net income to a B who was over 18 but under 25.
Thank you Jack. I agree that accumulated income will be subject to the exit charge. But does the accumulation affect the effective rate applied on the exit?