Retrospective Trust Tax Returns and payment of tax

I have a Trust where there was to be a specific gift from the deceased Estate into the Trust. The deceased died in 2018 but the assets are still currently in the Estate along with the income earned on those assets due to varying factors that are nearing completion.
I am aware that the Trust (being the specific legatee) cannot be assessed on the income until it is actually received. When everything is finally transferred the Trust will be required to submit retrospective tax returns to report the income for 18/19 onwards per CIR v Hawley.

My question is at what point does the income tax actually become due for payment? I am struggling to find anything to suggest a timeframe. If for instance these retrospective TR’s were submitted in 2024/25 would the Trustees have a deadline for payment of 31 January 2025 or would it become due immediately?
Thank in advance

As the Estate still appears to be in administration, the Estate should be submitting any tax returns that may be required and once it transfers the specific gift into the trust then, if there is any income attached to that gift, it should also provide the trustees with an Estate form R185. Thereafter the trust will have to complete and submit its own tax returns.

The logic of Hawley surely dictates that all the past income becomes taxable in the tax year in which it becomes disposable by the legatee: the date it becomes receivable, so the legatee could sue for it, not when paid if later

Not sure I agree with Jack.

With respect to specific legacies the beneficiary is entitled to the income arising thereon from the date of death. On receipt of the income the beneficiary is subject to tax in the tax year the income received actually arose to the PRs (ie not the tax year of receipt by the beneficiary) per Hawley.

However, until the beneficiary receives the income no tax charge can arise.

Malcolm Finney

In that case the normal assessment time limits will surely apply, in the absence of cullusion over non-receipt. For those happy to wait more than 4 years sounds like a plan

There is no tax due by the trustees if it there is an IIP. The trustees would have no liability in excess of the tax already paid (or should have been paid) by the executors. The rest of this post is on the basis that the trust is discretionary.

If the income exceeds £1,000 in any of the relevant years then the trustees would have tax to pay on the income for a year on any excess over the £1,000 basic rate band. As others have said and HMRC concur (at TSEM7490) the income is assessable in the year the income arose. At this point you come across the rock of the TMA. Assuming the trustees don’t file a 2020 tax return by Friday, then they can volunteer TRs for 2020/21 onwards. But I advise against because the due date of the tax for each year is the 31 Jan next following the end of the year and considerable interest will be charged. Better to write to HMRC to give full details and offer to make a contract settlement with interest remitted. It will be easier to get HMRC not to charge interest in the first place than to get them to forgo interest once charged. Years prior to 2020/21 can be assessed by HMRC (or included in the contract settlement) but if the trustees have a reasonable excess for failing to notify HMRC of their liability under s7 then HMRC can’t validly assess, Since at 5/10/19 the trustees had had no income for 2018/19 they have a very good RE for not making a timely notification for that year. Ditto for other years.

But that may prove to be a pyrrhic victory if the income is paid out to the beneficiaries as the tax not paid on income is replaced by the tax pool charge.

Is it not the case that any additional income tax which may become payable by a specific legatee following assent by the PRs and relating back to the tax year when the income arose to the PRs is payable on payment dates relating to the tax year of assent?

Malcolm Finney

Hawley v The Commissioners of Inland Revenue had absolutely nothing to do with a specific gift by will nor with any trust, whether IIP or DT. Hawley made an extremely convoluted contract with a company and a director whereby he lent a sum of £7000 to the company and was to be repaid by interest on debentures and a share of the company’s profits on an annual basis. The company failed to pay the latter on a regular basis and paid 2 lump sums instead. These were assessed for the years of receipt on a preceding year basis (remember that?). The taxpayer claimed successfully to spread the sums over the years in which they should have been paid.

How good a precedent is this for the position of a specific legatee? His entitlement, by relation back, to the legacy and thus to any income from it, does not crystallise unless and until the PRs signify that neither is needed for administration. Hawley’s entitlement to the share of profits became due and payable, so he could have sued for it, year by year. I think TSEM7490 is wrong in law.

The original query was about a specific gift into a trust. That is quite differerent. It places the income from the assets destined for the trust into Chapter 6 of Part 5 ITTOIA 2005 plus s483 ITA 2007 if the trust is a DT. So the PRs and any beneficiaries of the trust who receive income are taxed during the AP under the statutory scheme for “estate income”. So I disagree with Duncan. When the AP ends trustees of a continuing DT are treated as receiving from the PRs a sum of taxed income with an opening pool credit and are most certainly not taxed year by year retrospectively on income accruing due during the prior AP. And Hawley has absolutely nothing to do with a gift by will to trustees, other than bare trustees.

I am not sure that it would be helpful to rehearse the assessment rules for Surtax in 1914-1927 but the lump sum assessments were presumably made in time, despite the substitution of the proration basis. As I also said above there is what Duncan calls the “rock”. The income from a specific legacy cannot be assessed as it arises. Therefore the taxpayer cannot return it on that basis. If it has to be prorated once received it can only be returned in the year of receipt and only assessed within 4 years of each year of receipt, if HMRC is right. The sinner may well repent of that, one imagines, if it is to its advantage. Interest cannot run from some past notional due dates and no penallties or ETL assessments as long as the taxpayer files timeously for the year of receipt. He would then not be careless or deliberate.

This is a situation where neither taxpayer nor HMRC is at fault. I would advise the taxpayer, the specific legatee, to return the income on time and, unprompted, contact HMRC but not offer payment until agreement is reached on what is due within legal time limits for assessment. It may suit the the legatee to prorate the income but not if HMRC want a chunk of interest. There cannot be an historic due and payable date for tax on income that is not taxable unless and until it is actually received as the taxpayer has had no means of returning it nor HMRC means to assess it.

Jack Harper

A slip. If HMRC is right they must assess within 4 years of each tax year to which income is attributed

Jack Harper

My long (and boring) commentary is wrong in that “estate income” is restricted to trusts of residue. A specific gift on trust is outside that regime. A DT is within s483 but an IIP beneficiary who is taxable on trust income per Archer-Shee is in the same position as an absolute specific legatee. The PRs pay him the income net of tax deducted or assessed on them as persons receiving e.g. rent when no longer required for admin.

Jack are you saying that you disagree with my post:

" With respect to specific legacies the beneficiary is entitled to the income arising thereon from the date of death. On receipt of the income the beneficiary is subject to tax in the tax year the income received actually arose to the PRs (ie not the tax year of receipt by the beneficiary) per Hawley.

However, until the beneficiary receives the income no tax charge can arise."

Malcolm Finney

The default time limit is, indeed four years where the taxpayer has submitted a tax return for the relevant year subject to an extension of time if HMRC can prove bad behaviour by the legatee or anyone acting on his or her behalf. It seems very unlikely in this case any such bad behaviour could be alleged let alone proved.

If no return has been made for the relevant year then the default time limit is 20 years, subject to a reasonable excuse defence which, if successful, would cut the time limit to four years.

This is on the basis that the assets have a UK situs.

I agree no charge on the legatee can arise until receipt. There may be an earlier charge at basic rate/by deduction on receipt by the PRs. What I do not accept is that Hawley applies to the legatee by making him chargeable in the earlier years the PRs received the income. In Hawley the income arose year by year. It was just delayed in payment through the payer’s default. Specific legacy income is just not like that. The entitlement to the income simply does not arise unless and until the PRs decide they do not need it for admin. It is their income when they receive it but not his until he does. So I agree with his being taxable on receipt but not on prorating backwards.

My analysis throws up no problems about the timing of returns, payment, interest, penalties and time limits. I dispute that Hawley is authority for prorating save for income received late but which arose earlier. That is why in essence there are special rules for traders and landlords about bad debt provisions and recoveries (basically now both via GAAP), unremittable foreign income, and deeply discounted securities held by individuals (profit taxed on disposal in the year of disposal not in the years of accrual). These disparate examples have in common an approach to taxing the subject when he is in funds which avoids all the collection issues. So if income on a specific legacy arises in Year 1 to the PRs and is released to the legatee in year 6 does TSEM7490 really mean that HMRC think they can assess it in year 6 as income of Year 1? My guess is that in practice the interval is not often that great but in my view they can assess it in year 6 as income of year 6 and Hawley does not prevent that or dictate some other procedure.

Jack Harper

I think we may have to disagree.

Where income on a specific legacy arises in Year 1 to the PRs and released to the legatee in Year 6 the so-called doctrine of relating back (under Hawley) provides that the income is deemed to have arisen to the legatee from the date of death. This results in the income tax liability of the legatee for earlier tax years to effectively be re-opened. It cannot be assessed as income of Year 6 as you suggest.

Whilst I’m not a fan of citing book authors as support when discussing issues I did come across the following piece from a book written by Robert Venables KC:

Trusts of Specific Gift
What of a specific gift … which is devised or bequeathed on trust?..the decision of Rowlatt J in IRC v Hawley [1928] might well come to the rescue (ie as there is no statutory provision corresponding to IHTA 1984 s 91). Although the case was concerned with income tax, it turned on the doctrine of relation back, the scope of which is by no means confined to income tax".

Malcolm Finney

Other texts express similar views.

Malcolm Finney

It is curious that Theobald on Wills makes no reference to any doctrine of “relating back”. Where does it come from? No tax statute. If your view of Hawley is correct then the assessment etc problems are real if infrequent. Tax law usually preserves delayed assessment/repayment rules to cope when charges are postponed and later reinstated. You do not comment on the difference between a specific legacy and Hawley’s contract as regards the tax point. Perhaps you see none

Jack Harper

I think the supposed doctrine of relation back is no more than a description of how the law of succession strives to preserve the specific gift in specie so far as is possible alongside the PRs’ right of marshalling i.e. to liquidate any assets to pay debts and testamentary expenses. This is reflected in Sch 1 Part 2 AEA 1925 (Order of Application of Assets where the Estate is Solvent) where a specific gift is number 6 down the order of priority.

Provided it does not have to be sold it becomes apparent at a certain point that the gifted asset and its income has always belonged to the legatee absolutely; but meanwhile that is not the position at all. Those who frame tax legislation seem to have a blind spot when it comes to the AP and its related jurisprudence. Exceptions are the statutory regime for income tax on estate income and s.91 IHTA. The TRS seems to have overlooked its legal consequences altogether.

In Hawley it suited the taxpayer to have the receipts spread, aka top-slicing. It must be borne in mind, especially by those who were not around in the horse-drawn era before Self-Abnegation, that assessment and collection worked differently and in 1925 the Inland Revenue clearly had no difficulty with the then current rules. My point is that the rules we have now are different. When the income is released by the PRs it clearly must be returned. The suggestion that the taxpayer should file serial returns for years 1 through 6, being the putative “arising” years, is at least surprising. Is it even possible? Not online it ain’t.

My suggestion is to return it in the year of receipt to avoid a default. The 4 year time limit, and the shorter period under ss 9A(2) and 29 (5) (a) TMA, then and only run for the taxpayer and against HMRC. So the 6 year and 20 year time limit are not relevant: there is simply no act of carelessness or deliberation etc per s36(1) or (1A) in any tax year prior to the year of receipt. The taxpayer can then argue for backward spreading per Hawley, if advantageous, as officially endorsed in TSEM7940, per the white space or its electronic equivalent.

There are no provisions for “re-opening” prior years, as Malcolm suggests. Compare s169C(9) TCGA, albeit with a 6 year window. Under what provision will HMRC make an assessment in year 7 for year 1, a year when no return was required and so no default has occurred and in relation to which s.29(1)(a) is simply not fulfilled ; “tax ought to have been assessed but has not been assessed”. No tax ought to have been assessed for year 1 and an assessment under s34(1) would be out of time. Limitation periods, whether under the 1980 Act or the CPR or tax statutes, can be arbitrary even capricious and unfair but where plainly applicable they are the law. I doubt that Uncle Rowlatt envisaged that a 2024 version of Mr Hawley would be able to plead limitation as to years no longer in date. If tax is chargeable on a receipts basis there can be no charge, either at the time or later, in respect of a year when nothing was received. A bullet payment of interest on a deposit is taxable for the year of receipt not spread back over the years of accrual.

I believe Hawley was correctly decided on its facts because the share of profits accrued due and was payable year by year save that the payer defaulted and had to pay belatedly lump sums in discharge of its obligations. In the absence of any relieving provision he should have been assessed year by year. Compare SAIM1160 (unremittable foreign income) for such a relieving procedure.

If a specific legatee’s income is taken for admin and he is compensated from the entitlement of a beneficiary higher up in 1-5 of the order under the AEA is the compensation assessable, if so when, and should it be paid net of tax? This may be just too much excitement for a single thread.

Jack Harper

Jack, I’m not sure I have anything further to add.

IRC v Hawley is cited by every source on tax I know as authority for relating a specific legatee’s income back to the date such income arose to the PRs (including Robert Venables’ KC book on trusts and, of course, HMRC).

Malcolm Finney