I’m clear that if income is paid directly from source to life tenant, it is mandated. But what of dividend income on a trust share portfolio managed by a professional investment manager which maintains a separate income account within the portfolio, whence income is paid on a regular basis to a life tenant, by order of the trustees. Is that income then “mandated” or because the account balance can at any time be redirected by the trustees does this mean that the trustees are deemed to have received it and therefore have to include in their annual tax return?
(PS - I know what I think but I have a colleague who argues otherwise!)
My view is that a dividend is not mandated to a beneficiary unless the
dividend is paid by the company directly into the beneficiary’s bank
account. Andrew M Mortimer
My view is that income is “mandated” when it goes somewhere automatically from a third party, without the intervention of the trustees, and without coming into the trustees’ ownership en route. I would have thought the scenario you describe does require the intervention of the trustees (you say, “by order of the trustees”) and therefore I would describe this as non-mandated.
My view follows that of Andrew. If the income is received into an income account by the brokers in the name of the Trust and paid out periodically I do not see that as having been mandated.
I think the answer here is that the income is not mandated. The Investment Manager is the agent of the Trustees and is collecting in the income and then paying it periodically to the life tenant (whether a fixed monthly amount or the amount on hand at the time of the payment).
If the IM was receiving the dividend and promptly paying it on to the Life Tenant then I think this smacks more of the income being mandated but, even then, there remains the argument that the IM is still acting as agent for the Trustees.
For the income to be properly mandated, it seems to me that each dividend payer must be instructed by the Trustees to pay its dividends directly to the life tenant.
The risk for the Trustees in not reporting the Trust Income to HMRC is a liability for penalties on failure to submit tax returns and failure to pay the income tax on any untaxed income.
We all agree that a mandate is (for example) an instruction by the shareholder/shareholders to pay income to a third party (eg life tenant) rather than themselves.
Most portfolios are managed on a discretionary basis, and the holdings in such a portfolio will be held in the name of the manager’s nominee company. The shareholder is the nominee, not the portfolio client (for example “Trustees of the (hypothetical) Leney family trust”). Those trustees could therefore never “mandate” a dividend to me as their beneficiary from the “dividend payer” (to use Graeme’s expression) - that mandate is not their to give. All the Leney family trustees can do is to direct the portfolio manager to pay income as it comes in their hands.
So does it follow that in all cases where there is a normal discretionary investment portfolio and hence a nominee holder of investments within the portfolio, that trustees cannot mandate income so as to avoid having to report receipt to HMRC? Because if it does I think a lot of people will have to revisit how they deal with annual tax matters for trusts.
Whereas I agree with many of the comments as to the strict definition of what being ‘mandated’ means, I struggle to understand the logic; especially if the income beneficiary returns the income on their personal tax return. This saves HMRC from having to deal with reclaims and the beneficiary the time and cost in requesting the same. Also, if the Trust Deed specifically gives a right ofincome to a beneficiary, and the Trustees simply collect the income/rent and forward on as they are obliged to do, would that not fall within ‘mandated’? What is the logic behind this?
As I said, I consider this to be a mandate to pay income and I am sure hmrc would not have a problem with it. Either arrangement is revocable at any time, so there is no practical difference.
I agree with the two Simons, especially if income is mandated monthly. For an interest in possession trust, I would only be concerned if there were relatively significant levels of untaxed income, for which the trustees could be held liable to account for basic rate tax (now dividend income is received gross this could become an issue) and in which case it might be prudent for the trustees to account for the tax. If the interest is received net of tax, there would be no need to show the income on the trust in any event (interest in possession trusts only).
Even when the income has been mandated, trustees need to ensure the beneficiary has been informed as to what income to return. As long as there are clear records of this, they cannot be held responsible if the beneficiary fails to return the income, but they could be at fault if basic rate tax has not been accounted for.