Income Tax rates for life interest in A&M

We have a long standing client which has two trusts previously set up and administered by a different firm. The two trusts are identical A&M trusts set up by husband and wife in 2004. The required amendments were not made and none of the grandchildren reached 18 before 2008 so the Trust is now RPT.

The bit that is confusing me is the tax rates applicable on the income. There are 5 grandchildren and one has reached the age where under the original terms of the trust he is entitled to 1/5 of the income. The rest of the income, as was common for A&M trusts is held for the education etc of the younger grandchildren.

There is a note on the papers sent over to us that given the life interest for the eldest grandchild is carved out of an RPT that the whole of the income of the trust is chargeable at trust rates. This gives a higher credit on the R185 which is reclaimable by the grandchild.

I can’t find anything to support this either in the legislation or the HMRC manuals. I would have thought that the 1/5 life interest proportion is taxable at basic rates with the 4/5 still held under discretion being taxed at trust rates. Am I missing something and if so can someone point me to where it is noted.

On the basis that the beneficiary has a vested and indefeasible interest in the income then the income is his (not the trustees) and subject to income tax on his part, not on the part of the trustees.

Income which is not that of the beneficiary which is to be accumulated falls within ITA 2007 s 480 and therefore subject to the rate applicable to trusts.

Malcolm Finney