Income tax treatment of protective trust

Trusts Discussion
1

I am dealing with a protective trust set up prior to 2006 where the life tenant has been declared bankrupt. I see that section 88 IHTA 1984 will apply and so the trust is not an RPT, no exit or anniversary charges will be due and the trust will aggregate with the life tenant’s estate on death. However I cannot find clear guidance on whether the change from a life interest to a discretionary settlement in respect of the income means that it is now liable to tax at the rate applicable to trusts, even if the trustees decide only to pay income to the former life tenant.

Does anyone have experience of this situation?

Jeremy Crouch
Clintons

2

Whilst it is some time since I had to consider this point, my recollection is that there is no equivalent provision for either CGT or income tax. Accordingly, any income arising after the protective trust was triggered will be taxed at the rate applicable to trustees.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

3

Typically, on the attempt by the beneficiary to alienate the interest a discretionary trust automatically arises at that time.

For income tax purposes the rate applicable to trusts applies to future income.

Malcolm Finney

4

Many thanks Paul and Malcolm.

Jeremy Crouch
Clintons