The deceased was owed interest on loan notes that were converted to shares a couple of years ago. The interest on the notes was not paid at the time it was due, and was only paid after death. The residue of the estate is left on life interest trusts for the widow.
The interest is clearly taxable on the executors at the basic rate. My query relates to what happens next. The apportionment rules do not apply, but nevertheless I don’t believe the life tenant of the will trust is entitled to the income because it arose wholly in respect of a period prior to death. It probably therefore should be retained by the executors qua trustees, as trust capital. Is there any further income tax to pay in that scenario? I am struggling to apply the relevant statutory provisions.
If the Trusts (Capital and Income) Act 2013 applies (for trusts arising under wills, where death occurred on or after1 October 2013), “Any entitlement to income … is to income as it arises”, and the requirement to apportion on a day to day basis over the period the income has accrued is negated (unless the trust instrument specifically provides otherwise).
Whilst, for tax purposes, the income may be deemed to “arise” when it is actually received, tax law does not govern the rights of beneficiaries. My personal feeling is that an income right “arises” when the income is due and payable, so that in the present case the unpaid income right would be an asset as at the date of death and form capital within the trust fund (as the income is said to have been “due” pre-death).
If, however, the company directors had the power to defer the payment of income on the loan notes, which they exercised before the due date, to prevent the income being due and payable during the deceased’s lifetime, it may be that the income did not “arise” until the directors specified a new date for payment. If that was post-death, the income could well now be payable to the life tenant on the basis that it will have “arisen” on the date it as now payable. I don’t consider this would apply if the original date for payment had passed by the time the directors decided to defer payment.
If the income on the loan notes is capital, I don’t think there will be any further income tax to pay, and the receipt should not be treated as the income of the life tenant for tax purposes.