IIP and Accumulation investments

Hi, I am hoping someone deals with these in practice and can help me determine the details on this issue.

Situation is a FIPDI created on death of W for benefit of H.
Funds invested in unit trusts, part in income funds and part in accumulation funds.
Clearly the trust will pay tax on the income on both.

I have two statements regarding tax and accounting

  1. I believe the income from the accumulation units, which is not received by the trust, is not income for trust law purposes, therefore will form part of the capital schedule. It seems sensible that the tax due on this would also come off the capital schedule so that the income schedule contains only distributable income and is brought to nil after distribution each year.

  2. I also believe that as the income is not distributed to the beneficiary, as it is not available for distribution, the income does not go on the beneficiaries R185.

Do members agree with the above treatments?

Thank you in advance.

B Prior
Gepp & Sons

I would not consider accumulation units appropriate for a life interest trust-the life tenant is entitled to income from the trust assets, or to enjoy them in kind.

Simon Northcott

The answer depends upon the nature of the “accumulation”

  1.  Unit trust managers declare a dividend, which is then re-invested in further units – dividend is income in the trustees’ hands and due to the life tenant.  Trustees need to make an adjustment between capital and income.
  2.  No dividend is declared and income is just rolled up within the unit trust to enhance the value of individual units – accretion is a capital enhancement and will effectively be subject to CGT when units realised.
  3.  Offshore unit trusts – regardless of whether they are “reporting” or “non-reporting” funds, the life tenant will be entitled only to dividends declared.  Even though non-reporting funds may be liable to UK income tax upon a disposal of units, rather than CGT, the tax liability will attach to the proceeds of sale and therefore be a capital deduction.

Paul Saunders

Whilst I agree in principle with Simon – that accumulation units are not necessarily appropriate where there is a life tenant – the Trustee Act 2000 moved away from considering the individual trustee investments, directing attention instead to the appropriateness of the trust portfolio as a whole. Trustees are therefore permitted to invest in a mix of assets providing high income returns and those offering no return, provided that the overall strategy is suitable for the circumstances of the trust in question.

Although pure accumulation trusts may be suitable in certain instances, I question the relevance of holding in an IIP trusts any of those which, whilst described as “accumulation units” are effectively a dividend re-investment arrangement.

Paul Saunders

I would like to be sure I understand correctly Paul Saunders’ comments in his first response on this post.

His first example involves a dividend declared which is then used to purchase additional units. I agree with his analysis of this (and would not regard these as “accumulation units”).

His second example involves no dividend being declared at all, in which case I agree that there is no income, and one assumes (and hopes) that any income received by the unit trust from the underlying investments is represented by growth in the capital value of the units.

My experience of accumulation units is that a dividend is declared (and this is taxable for income tax purposes), but the dividend is not paid. It is not used to buy additional units, but is simply rolled up into the unit trust. My understanding in this case is that the dividend is added to the base cost of the investment for CGT purposes (as well as being taxable income), in the same way as Paul’s first example, but I thought it was also income due to the life tenant for trust purposes, so that an adjustment between capital and income would then have to be made (again as per Paul’s first example).

Do you agree?

Diana Smart
Gordons LLP

I agree with Diana about the tax treatment of the declared dividend in that it is definitely taxable on the trustee and added to the base cost for CGT, but is it income for trust purposes as it is not received? Therefore I would not have thought it was due to the life tenant. Is it not really just a ‘tax fiction’ and therefore income for tax purposes but capital for trust accounting purposes?

B Prior
Gepp & Sons

This discussion just goes to show how inappropriate they are for a life interest trust.

Simon Northcott

With regard to Mr Prior’s posting, the trustees do receive the dividend, albeit in the form of additional units rather than cash.

The arrangement is similar to where a shareholder enrols in a company’s “dividend re-investment plan” where, instead of paying out a cash dividend, the company issues additional shares to the shareholder supported by a statement showing both the dividend and how it has been applied in the purchase of the additional shares. Despite applying the dividend in the acquisition of additional units, the trustees do receive the dividend and should account for it to the life tenant.

I anticipate the prospectus for any unit trust offering “accumulation” units where the accumulation is effected by the declaration of a distribution and the reinvestment thereof, will set out the mechanism by which this is achieved. If it does, then the entitlement to the distribution between capital and income of a trust is likely to be subject to the same considerations as applied in Bouch v. Sproule (1887).

Paul Saunders

Thanks Paul, but I am dealing with accumulation units where the number of units in the holding doesn’t change, it is simply that the value of each unit increases. This does seem quite different to a reinvestment plan.

B Prior
Gepp & Sons

When reading your last post, Brian, I had understood it to fall within the first type of accumulation units referred to in my posting of 8 June.

I have not previously come across a unit trust where a distribution is declared and rolled up within the existing units. In any such situation, even if the declared distribution were not to be deemed the income of a life tenant, I suspect it could still be income of the trustees for the purpose of assessing the trustees’ liability to tax under s.479 Income Tax Act 2007.

Paul Saunders

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