I am wondering if somebody can clarify the treatment of trust income that has built up in a trust over a number of years please and whether this has now in fact become capital.
The trust is discretionary and tax has been paid at the RAT such that there is a significant tax pool. The trust is still within the accumulation period but there has been no decision by the trustees to formally accumulate the income and nothing in the deed suggests that there is any requirement to do so. The trustees would now like to make use of this income towards school fees.
The accounts show the income in an âaccumulated incomeâ account but there doesnât seem to have been any consideration given as to whether this is in fact correct. (I note that HMRC guidance TSEM3780 states that income has been accumulated if it is shown as such in the presentation of the annual accounts). Does this mean that all income in the trust is now capital such that the tax pool is no longer available?
Aside from the accounting treatment there seems to be uncertainty with regards to when income becomes capital. If there is nothing in the deed to confirm, is there a period of time under which the income becomes capital by default?
I am not a solicitor but from a practical standpoint understand there is long-running history here between HMRC and practitioners, to the extent that HMRC changed the rules, at least for 10 year anniversary charges.
It is my understanding that if the trust Deed is silent, there is a rebuttable presumption that any income not distributed should be accreted to capital; however as the Deed is silent, there is also no hard or fast rule as to how long that process should take and there may be some quite lengthy interval of time elapsed between when the income arises and trust accounts are drawn up so that the trustees know what quantum of net income they have available; also as you have noted, they may wish to apply that net income towards school fees, at their discretion,at some future point so do not formally âaccumulateâ it. Large undistributed income balances are common in trust accounts and are disregarded for IHT. Hence this is a grey area. Consequently HMRC decided unilaterally that any undistributed income that had arisen more than 5 years prior to a 10 year anniversary, would be included ânotionallyâ as capital for calculating the 10 year IHT charge, even though it may not in fact actually be capital, and thus is still available for discretionary income distributions.
The tax pool does not die, despite several attempts by HMRC to kill it off. Where income has been accreted to capital there may not be sufficient net income available for distribution to utilise it.