A discretionary trust, principally for the benefit of children of the trustee (3 daughters) has been registered with HMRC for tax and a tax return for 2025 has been filed. The trust holds shares in the settlor’s company and receives dividends on those shares. It has no other income.
Is it not possible to mandate the dividend income directly to the 3 daughters and avoid having to file tax returns, saving administration and costs? Someone said that this is not possible in the first 2 years of the trust, but I could not find any confirmation that this is the case.
I don’t see how you can mandate income to a discretionary object. What you can do is to give each daughter a revocable interest in possession. Then you can mandate each of them a fixed share of the income arising from the dividends (alone if you so wish).
They will each be taxed on the income as their own (with the trustees not liable and no aggravation of a tax pool with insufficient credit against tax withheld from distributions).
This is a NQIIP and its grant and termination have no effect for IHT or CGT.
Presumably it does not matter whether the income is ‘mandated’ by a deed of appointment or trustees’ resolution (which might be simpler and more cost effecitve??)
I think a written record is always good practice but the most important formality is that the IIPs should be granted by means of whatever formalities are firmly within the scope of the trust instrument and the law of trusts.
S.53(1)(a) LPA 1925 will require writing at least as there is a creation of equitable interests in land. The trust instrument may ordain a deed.
The Kessler precedents provide that a power of advancement may be exercised under hand only but, unless that term is contextually further defined, it would be prudent to assume that “advancement”, whether as an ordinary English word or as a term of art, does not give the trustees or beneficiaries cover. The same precedents require a deed for the exercise of a power of appointment and that has the salutary attribute of not being inappropriate, whether strictly essential for validity or not.
HMRC have some species of dog in this fight. But they are unlikely to unleash it unless someone with standing challenges the efficacy of the trustees’ actions, In principle or as to formalities. Their invariable practice is to allow the contesting parties to waste their money on grateful lawyers while they sit on the fence and await the event. A vanishingly rare example of responsible conservation of public money.