CheckLists.Tax (beta)
i8. Distribution to beneficiary
GENERAL
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- Capital or income distribution?
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Use of capital power or income power?
- A payment out of trust capital using power to advance capital will be capital.
- A payment out of trust income using a power to apply income will be income.
- Income powers include interests in possession and rights to annuities.
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Beneficiary right to fixed sum of income, to be topped up with capital if needed
- If a beneficiary is entitled to a set amount of income per year and the trustees are required/have power to top it up out of trust capital if there is insufficient income, that is income for the beneficiary (Cunard's Trustees v. IRC, TSEM3785).
- "The testatrix was in fact providing for a defined standard of life for her sister, that provision being made in part out of income and in part (at the discretion of the trustees) out of capital. The purpose was an income purpose and nothing else." (Cunard's Trustees)
- Query whether if that same beneficiary is also entitled to trust capital under a capital power, and the top up is discretionary, it will be capital (Brodie's Trustees).
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Regular discretionary payments out of trust capital
- Trustees recurrently exercising a power to pay out of capital did not turn those payments to income in Stevenson v. Wishart.
- Query whether this was limited to 'emergency' payments (nursing home expenses).
- If the power is specifically a power to maintain a beneficiary (rather than simply for their benefit), might be income as this suggests an income power.
- HMRC say: "A payment made out of trust capital...is normally regarded as capital of the beneficiary and so is not taxable" (TSEM3781).
- "Barbara has a discretionary interest in income. The trustees may also advance capital to or for her at their discretion. Payments are capital and not taxable on her." (TSEM3871).
- Might be different if trust income was repeatedly accumulated before that amount was distributed as capital.
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Duty to make regular payments out of capital
- Query whether income for the beneficiary (Jackson's Trustees).
- HMRC say: "Carina has an annuity of £10,000 and in addition, the trustees have the power to apply capital at their discretion for her benefit. Payments are capital and not taxable on her." (TSEM3781).
- However: "Jackson’s Trustees v CIR 25 TC 13 established that payments out of trust capital are income for tax purposes in the hands of a recipient where, by the terms of the relevant trust instrument regular payments out of capital are required to be made such that they can be treated as ‘annual payments’." (TSEM3784).
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Payment to compensate income beneficiary for loss of income
- HMRC give the example of an enhanced stock dividend being trust capital and an adjusting payment made to beneficiary. The adjusting payment is income (TSEM3786).
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Implied powers
- Note the implied powers to apply income and advance capital in Trustees Act 1925, s.31, s.32.
- HMRC accept that the power to treat accumulations 'as if they were income arising' does not decapitalise the accumulations (TSEM3782).
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Legislation:
Cases:
Brodie's Trustees v. IRC (1933) 17 TC 432;
Jackson's Trustees v. CIR 25 TC 13;
Cunard's Trustees v. IRC (1946) 27 TC 722
HMRC manuals: TSEM3781;
Commentary:
See also:
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- What is trust capital?
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Accumulated income
- Loses its character as income and becomes trust capital (TSEM3781).
- "Once accumulated income is forever capitalised. Where such accumulations have been released the money must therefore have been received by the beneficiary as capital." (TSEM3782).
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Income retained due to beneficiary being an infant
- If beneficiary has right to income and trustees have no discretion to withhold, but it remains in their hands because he/she is an infant, the beneficiary is entitled to the income (IRC v. Blackwell).
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Demergers
- The basic position is that the shares received in a direct demerger are capital, but those in an indirect demerger are trust income.
- Trusts (Capital and Income) Act 2013, s.2, classifies al shares on a tax exempt demerger as capital (TSEM3787).
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Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
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INCOME TAX (BENEFICIARY)
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Interest in possession trust
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- Distribution of income to person with interest in possession
General rule
- If it is a transparent IIP, the beneficiary is taxed as the income arises.
- See Baker v. Archer-Shee.
- Does not apply where right to income is contingent/liable to be divested.
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Settlor interested: income attributed to settlor
- Insofar as the income of the trust was attributed to the settlor, it is not the income of the beneficiary - see i4. Trust income.
- The trustees are, however, taxed on it at the basic rate - see i4. Trust income.
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Right to specific amount of income
- If the right is to a particular sum of income rather than the whole of the income of the trust or from a particular source it is difficult to see how the general rule can apply.
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Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
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- Minor child of settlor receives trust income - not child's income if attributed to settlor
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- Income under a settlement is treated as income of the settlor, and the settlor alone, if, in that year, it is paid to or for the benefit of a relevant child of the settlor (s.629(1)).
- See further below.
- Note that if settlor is non-resident, only UK source income is attributed. Foreign source remains income of the IIP-holder.
- Accordingly, an IIP-holder is treated as not having a source of income and is not charged.
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Legislation: ITTOIA s.629;
Cases:
HMRC manuals:
Commentary:
See also:
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Discretionary trust: income distributions
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- Income distributions to beneficiary normally taxed as annual payment
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General rule
- Payments from trusts that are income in the hands of the beneficiary will normally be annual payments and charged as such (ITTOIA s.683).
- Tax is charged on the full amount of annual payments arising in the tax year (s.684(1)).
- Query whether the beneficiary is taxable if the trustees resolve to make a payment in the tax year, but do not (see TSEM3759).
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Meaning of annual payment
- Case law establishes that, in general, to be an annual payment, the payment must be (IRC v. Whitworth Park Coal):​
(1) Of the same kind as specific instances of interest an annuities.
(2) Not merely voluntary.
- Payments by trustees to beneficiaries, even in the exercise of a discretion, are not voluntary (Tollemache).
- Payments by trustees to non-beneficiaries could, in theory, be voluntary, but query the legal basis (Lindus and Hortin).
(3) Annual in the sense of recurrent or capable of recurrence.
- Payments at random intervals of varying amounts may still be annual (Whitworth Park Coal).
- Assumed to be the case for s.683(3) - see below.
(4) Pure income in the recipient's hands.
- See above on capital v. income distributions from trust.
- Pure income means that recipient must not have incurred deductible expenditure in return for the payment.
- Thus contracting with a butcher for an annual sum to supply meat for a year is not pure income for the butcher (Earl Howe v. IRC).
- Need not be pure bounty - some inducement to make the payment may not prevent it being annual payment (Campbell).
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One off payments
- May be annual payments for this purpose because frequency of payments is ignored (s.683(3)).
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Distribution of accumulated income
- Once the income is accumulated it becomes part of the trust capital and is unlikely to be income in the beneficiary's hands.
- This should apply where a beneficiary is entitled to the income subject to a contingency (e.g. reach majority) and the contingency is subsequently satisfied.
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Grossing-up and tax credit on discretionary payments from UK resident trust​
- See below.
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Legislation:
Cases:
Campbell v. IRC [1970] AC 77;
HMRC manuals:
Commentary:
See also:
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- Income distributions in kind as annual payments
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- Payment can take an extended meaning (see NICs case law).
- But if not a payment, the mere receipt of a benefit does not, of itself, give rise to tax on the beneficiary.
- See i9. Benefits provided by trust for the various tax charges that may apply.
- Tax on trustees applies to payments in money's worth (ITA s.493(5)).
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Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
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- Priority of other tax charges
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- Annual payments charge only applies to a payment if it is not otherwise charged to income tax (except the miscellaneous income charge)
- Either charged under another provision or would have been but for exemption.
Legislation: ITTOIA s.683; s.687(2).
Cases:
HMRC manuals:
Commentary:
See also:
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- Settlor interested: distribution 'in respect of' income attributed to the settlor under settlements code (no further tax)
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Distribution to settlor
-Where the settlor receives:
(1) Discretionary income distribution from the trustees that is 'in respect of income';
(2) Income of the settlement is attributed to the settlor under the settlements code; and
(3) The distribution is made 'out of' the income arising to the trustees on which the settlor is charged
Then: the annual payment is not treated as the settlor's income for Income Tax Act purposes (s.685A(5)).
- No grossing up of the annual payment or treating it as made after deduction of trust rate tax under ITA s.494 (s.685(6)).​
- Trustees not liable to account for tax on the distribution (because not within ITA s.494).
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Distribution to other beneficiary
-Where a beneficiary other than the settlor receives:
(1) Discretionary income distribution from the trustees that is 'in respect of income';
(2) Income of the settlement is attributed to the settlor under the settlements code; and
(3) The distribution is made 'out of' the income arising to the trustees on which the settlor is charged
Then: the annual payment is income of the beneficiary, but the beneficiary receives a credit at the additional rate (s.685A(3)).
- Credit is non-repayable (s.685A(4)).
- Credit cannot be set against tax on any other income (s.685A(4)).
- The annual payment is treated as the highest part of the beneficiary's income, except in relation to top slicing relief (s.685(5A)).
- This avoids other income being pushed into a higher tax rate.
- Income might still affects tax reliefs and benefits that are means tested.
- No grossing up of the annual payment or treating it as made after deduction of trust rate tax under ITA s.494 (s.685(6)).​
- Trustees not liable to account for tax on the distribution (because not within ITA s.494).
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When is a distribution in respect of income if it is not clearly the income?
- Query to what extent the money/asset distributed as the income distribution has to actually be either the income or derived from the income.
- HMRC do not appear to expressly focus on the source of the funds used:
“Where you tax the settlor on the income arising to the trust, discretionary payments out of the trust to the settlor are not further taxable. For years up to and including 2005-06 the phrase in ITTOIA/S687(1) 'but would not be his income if it were not made to him' means ITTOIA/S687 does not apply to payments that fall to be treated as the income of the settlor under ITTOIA/S624. For 2006-07 onwards discretionary payments made by the trustees to the settlor are taken out of charge by ITTOIA/S685A(5).” (TSEM4570).
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Legislation:
Cases:
HMRC manuals: TSEM4570;
Commentary: Chamberlain, §11.34 onwards;
See also:
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- Minor child of settlor receives discretionary payment of trust income/out of accumulated income - full credit for tax if income treated as settlor's
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General rules
- Income under a settlement is treated as income of the settlor, and the settlor alone, if, in that year, it is paid to or for the benefit of a relevant child of the settlor (ITTOIA s.629(1)).
- See further below.
- Note that if settlor is non-resident, only UK source income is attributed. Foreign source remains income of the IIP-holder.
- If income is accumulated and a payment is subsequently made to or for the benefit of the settlor's child, the payment is deemed, for the purposes of s.629, to be a payment of income insofar as retained/accumulated income is available (s.631).
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Effect on child of income being treated as settlor's
- If the child had a right to the trust income as it arose, see above on interest in possession beneficiaries.
- If the payment is a discretionary income distribution and thus an annual payment, beneficiary gets a non-repayable tax credit at the additional rate - ITTOIA s.685A, see above.
- Section 685A applies whichever basis applies for attributing the income to the settlor (see the reference to s.619(1), which includes the charge under s.629).
- Distribution must be "in respect of income" and made "out of income" arising to the trustees on which the settlor is charged. See above.
- If the payment is a discretionary capital distribution it is not an annual payment. See below.
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Legislation: ITTOIA s.629;
Cases:
HMRC manuals:
Commentary:
See also:
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- UK resident trustees making discretionary annual payment: credit for the beneficiary (tax for trustees)
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​General rule
- Where (ITA s.493):
(1) Trustees make an annual payment to a person in exercise of a discretion.
(2) The trustees are UK resident.
(3) The payment is intrinsically income of the beneficiary for income/corporation tax purposes.
- Does not include employment income.
- Does include situations where the beneficiary is a child of the settlor and the payment is treated as the settlor's income under ITTOIA s.629.
then (ITA s.494):
(1) The payment is treated as net of income tax at the trust rate.
(2) The beneficiary (or in a s.629 case, the settlor) is treated as having paid income tax equal to income tax at the trust rate on the grossed up sum.
- Beneficiary has a right to request a statement from the trustees of the relevant amounts (s.495).​
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Trustee tax
- The trustees have to pay tax essentially equal to the credit to the beneficiary, see below.
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Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
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- Non-UK resident trustees making discretionary annual payment: no credit for beneficiary
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- ITA s.493 does not apply to a non-UK resident trust, and accordingly there is no credit for the beneficiary nor tax for the trustees.
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Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
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- Non-resident beneficiary only chargeable if payment has UK source (i.e. UK resident trust)
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UK resident beneficiary
- Taxable on annual payment whatever the location of the source (i.e. including payments from non-resident trusts) (ITTOIA s.577(1)).
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Non-UK resident beneficiary
- Source of trust income is based on residence of trust (see Berrill and Memec).
- Taxable on annual payments from UK resident trust (s.577(2)).
- It is disregarded income within ITA s.811 (s.813(1), s.826).
- But the tax deducted at source cannot be reclaimed (s.811(4)).
- Not taxable on annual payments from non-UK resident trust, because source is non-UK (s.577(2)).
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Legislation:
Cases:
IRC v Berrill [1981] STC 784;
Memec Plc v. IRC [1996] STC 1336;
HMRC manuals:
Commentary:
See also:
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Discretionary trust: capital distributions
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- Capital payments to or for settlor/spouse - matched to trust income/future income (Settlements Code, charge 3)
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General rule
- Where a capital sum is paid (directly or indirectly) by trustees to the settlor/spouse it is treated as income of the settlor up to the available income amount (ITTOIA s.633).
- Capital sum paid at settlors direction/for settlor's benefit treated as paid to settlor (s.634(5)).
- If there is insufficient available income in year 1, it is matched to available income in future years (s.633(3)).
- Up to a maximum of 10 years after the tax year in which the capital payment was made (s.633(4)).
- Section 633 applies even where the capital sum was paid in a year in which the trust was settlor interested (but matching only occurs for 11 years).
- References to settlor include references to spouse/civil partner (s.634(7)).
- Capital sums that could only become payable in certain circumstances, e.g. death of person under age 25, are excluded (s.634(3)).
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Distribution in kind
- Query whether a distribution in kind is a capital sum.
- Associated payments in relation to capital sums from companies expressly includes a transfer of an asset (s.643(3)).
- Chamberlain suggests it does not (§11.59).
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Available income
- Available income is income arising under the settlement in that year or a previous year which has not been distributed (s.635).
- Deduct amounts of income previously matched under s.633.
- Deduct income treated as the settlor's income under s.624 or s.629.
- Deduct a sum equal to trust rate tax on income not treated as the settlor's.
- Undistributed income:​
- Deduct sums that were paid to by the trustees and were income of the recipient (s.636(2)).
- Exclude (s.637(1)):
(1) Interest
(2) Sums paid to a body corporate connected (s.637(8)) with the settlement.
(3) Sums paid to trustees of another settlement made by the settlor.
- Deduct expenses properly chargeable to income.
- Interest may be deductible under this head subject to the rules in s.637(3) - (7)
- For charitable trustees see s.636(6).
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Grossing up and tax reduction
- Capital sum treated as income under s.633 is grossed up at the trust rates (s.640(1)).
- Seems to apply even if trust did not pay any tax on the income.
- Settlor gets a tax reduction at, up to, the trust rate - see detailed rules in s.640(2) - (7).
- Tax reduction capped by reference to tax paid by trustees on the matched income (s.640(3)(c)), so no credit if no tax paid (e.g. non-resident).
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Relevance to capital distributions
- If the trustees have power to make capital distributions to the settlor/settlor's spouse, the trust will be settlor interested in any event.
- However, it can apply to capital distributions where:
- The trust was not settlor interested when the income arose, even if it is when the capital payment is made. Historic income can be matched.
- Income arises after the trust ceases to be settlor interested and is matched with a capital distribution made when it was settlor interested.
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Other capital payments (loans, repayments of loans, other benefits)
- The capital payments rule covers payments to the settlor by way of loan, repayment of loan and other sums paid otherwise than for full consideration (s.634(1)).
- Does not include other sums if income (need not be taxable income - CTM61070)
Subsequent trust transfer: matching capital payment to income arising in subsequent trust
- See i3. Transfer between trusts.​
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No settlor right to reimbursement
- The settlor has no right to reimbursement under the code for any additional tax due beyond the credit (if any) because it is limited to s.624 and s.629 tax (s.646(1)).
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See further
- i9. Benefits provided by trust.
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Legislation: ITTOIA s.633;
Cases:
HMRC manuals:
Commentary: Chamberlain, §11.54;
See also:
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- Capital distribution to body corporate which pays capital sum to settlor/spouse: capital sum treated as paid by trustees
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General rule
- Where:
(1) A capital sum (including loan, repayment of loan) is paid to the settlor by a body corporate connected with the settlement; and
(2) The trustees make an associated payment (directly or indirectly) to the body corporate,
Then: the capital sum is treated as paid by the trustees to the settlor for the purposes of s.633 (ITTOIA s.641).
- Connected body corporate - see s.637(8).
- Reference to settlor includes spouse (s.643(1)).
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Associated body corporate
- A payment by/to a body corporate which is associated with another body corporate may be treated as paid by/made to that other (s.643(4)).
- Associated - see CTA 2010 s.449.
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Associated payment (transfer not for full consideration, 5 year limit)
- Means any capital sum and any other sum paid or asset transferred other than for full consideration in money or money's worth (s.643(3)).
- Only take account of payments/transfers 5 years either side of the capital sum.
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Deemed capital sum limited by amount of associated payments
- The amount of the capital sum treated as paid to the settlor by the trustees is capped by the total associated payments up to the end of the tax year (s.641(3)).
- If more associated payments are made in subsequent years, more capital sum is treated as paid (s.641(4)).
- Note associated payments capped at 5 years from date of capital sum (s.643(3)).
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Exclusion for certain loans to settlor
- Loan to settlor by a body corporate is not caught where (s.642):
(1) The whole loan is repaid within 12 months.
(2) No loans by any connected body corporate have been outstanding for more than 1 year "in any period of 5 years".
(3) No loans made by the settlor to any connected body corporate have been outstanding for more than 1 year "in any period of 5 years".
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Exclusion for certain loan repayments
- Repayment of loan to settlor by a body corporate is not caught where (s.642):
(1) The whole loan is repaid to the settlor within 12 months.
(2) No loans by any connected body corporate have been outstanding for more than 1 year "in any period of 5 years".
(3) No loans made by the settlor to any connected body corporate have been outstanding for more than 1 year "in any period of 5 years".
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Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
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- Minor child of settlor receives accumulated trust income: attribution of income to settlor (no tax for beneficiary)
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General rule
- If income is accumulated and a payment is subsequently made to or for the benefit of the settlor's child, the payment is deemed, for the purposes of s.629, to be a payment of income insofar as retained/accumulated income is available (s.631).
Distribution is capital in child's hands
- If the payment of accumulated income is capital in the child's hands, it will not be an annual payment.
- Query whether it can be matched to TOAA income/s.87 gains.
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Distribution is income in child's hands
- An income distribution to the child will be an annual payment and taxable as income.
- However, the payment is likely to be 'in respect of income' that has been attributed to the settlor, giving rise to a non-repayable tax credit at the additional rate (s.685A(3)) - see further, above. ​
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Legislation: ITTOIA s.631;
Cases:
HMRC manuals:
Commentary:
See also:
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- Capital distribution to other discretionary beneficiary
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- Not taxable as an annual payment because not income.
- May be matched to TOAA income/s.87 gains - see i9. Benefits provided by trust.
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Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
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Transaction in securities
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- Capital distribution following transaction in securities by non-resident trustees​
- TiS is potentially in point where non-resident trustees are party to a transaction in securities and the benefit of that transaction is passed on to a beneficiary in capital form. The beneficiary may have obtained an income tax advantage, despite not being party to the TiS.
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Legislation:
Cases:
HMRC manuals:
Commentary: TCCR W6.2.4;
See also:
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INCOME TAX (TRUSTEES)
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UK resident trustees making discretionary annual payment
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- Tax charged on excess of (grossed up) annual payment over trustees' tax pool
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​General rule
- In a tax year where a payment is made as a result of which income tax is treated as paid under the credit for the beneficiary provision (above), the trustees must pay income tax on the amount by which:
(1) The total amount of income tax treated as paid; exceeds
(2) The trustees' tax pool available for the tax year.
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Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
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- Distribution 'in respect of' income attributed to the settlor under settlements code (no further tax)
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- See above in relation to beneficiary.
- No grossing up of the annual payment or treating it as made after deduction of trust rate tax under ITA s.494 (s.685(6)).​
- Trustees not liable to account for tax on the distribution (because not within ITA s.494).
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Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
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Non-resident trust making discretionary annual payment
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- Trustees not liable to UK tax
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- ITA s.493 does not apply to a non-UK resident trust, and accordingly there is no credit for the beneficiary nor tax for the trustees.
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Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
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INCOME TAX (OTHERS: SETTLEMENTS CODE)
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(2) Trust income paid to/benefits minor child of settlor in year it arises: treat trust income as settlor's
General rule
- Income under a settlement is treated as income of the settlor, and the settlor alone, if, in that year, it is paid to or for the benefit of a relevant child of the settlor (s.629(1)).
- Note the charge is not triggered based on the child having an interest in the income (e.g. potential beneficiary), the child must actually receiving/benefitting from it.
- Also applies if the income would otherwise be treated as income of a relevant child of the settlor.
- Does not apply if income already treated as settlor's under s.624.
- If settlor is non-resident, only UK source income attributed - see below.
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Gross up the payment
​- If the payment to the child is an annual payment (i.e. income) by UK resident trustees it will need to be grossed up (ITA s.493(3), specifically referring to payments treated as income of the settlor under ITTOIA s.629).​
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Relevant child
- Minor child (under 18) who is unmarried/not in a civil partnership (s.629(7)).
- Includes stepchild, but not foster child.
- Does not include grandchildren or adult children.
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De minimis exception
- De minis - no attribution if income in tax year does not exceed £100 (s.629(3)).
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Deemed income
- Things that are only deemed to be income for tax purposes are within s.629.
- Accrued income profits, lease premiums etc.
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Effect of treating income as settlor's
- Income treated as being the settlor's should, logically, not be available for matching under transfer of assets abroad, because it is not income of the person abroad (Dunsby, §173; Chamberlain §11.20). HMRC appear to take a different view (INTM600940).
- Income can still be taxed on trustees as persons receiving the income (s.646(8)).
- See i4. Trust income.
- IIP holder not chargeable on such income (TSEM4512).
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Quantum of income
- Apply the usual income tax rules for each type of income to calculate the amount of income (PIM1045).
- Same deductions allowed as would be allowed if income had been received by the individual (s.623).
- Trust expenses not used to reduce the income of the settlor.
Reliefs
- Same reliefs allowed as would be allowed if income had been received by the individual (s.623).
- Settlor not entitled to set off trust losses against trust income (PIM1045).
- Settlor not entitled to set off trust losses against personal income.
- Settlor may be able to use trust losses where he/she is the life tenant and carries on the relevant business (PIM1045).
- But not if trustees carry on the relevant business.
- Settlor may be entitled to set off personal losses against attributed trust income (PIM1045).
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Rate of tax
- Same rate as if the income had arisen directly to the settlor (s.619(2)).
- Treated as highest part of total income (s.619A(2)).
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Recovery of tax by settlor from trustees
- Settlor is entitled to recover from the trustee the amount of tax paid (s.646(1)).
- This may happen because trustees are entitled to deduct trust expenses in calculating liability to trust rates, settlor is taxed on gross income.
- Failure to do so may be a settlement/transfer of value to the trust.
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Credit for UK tax paid by trustees
- Where the trustees have paid tax on the income (e.g. UK resident), settlor gets credit for that tax (TSEM4550; TSEM4512).
- If settlor's liability is less than the amount paid by trustees, any repayment must be paid to the trustees by the settlor (ITTOIA s.646(4), (5)).
- Repayment of tax includes set off against other liabilities (TSEM4550).
- Paying the tax recovered to the trustees is not an IHT chargeable transfer.
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Credit for tax paid by IIP holder
- Any refund of tax must be paid to the IIP holder by the settlor (s.646(4)).
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Legislation: ITTOIA s.629;
Cases:
HMRC manuals:
Commentary: Chamberlain, §11.42;
See also:
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(2A) Trust income accumulated followed by subsequent payment/benefit to child of settlor: income attributed to settlor
General rule
- As noted above, the settlements code charge on payment to the settlor's children only applies if/when the income is distributed.
- No immediate settlor charge if the income is accumulated (and the settlement is not otherwise settlor interested).
- If income is accumulated and a payment is subsequently made to or for the benefit of the settlor's child, the payment is deemed, for the purposes of s.629, to be a payment of income insofar as retained/accumulated income is available (s.631). Accordingly, apply s.629 on that basis.
- Must still be an unmarried child at the time when the payment is made.
- Income available is total income that has arisen under the settlement since it was made less disregarded income.
- If settlor is non-resident, only UK source income attributed - see below.
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Income not available
- Various types of income are disregarded in determining whether retained/accumulated income is available (s.631(4)):
(1) Income treated as income of the settlor;
(2) Income paid (whether as income or capital) to/for the benefit of a beneficiary who is not a child of the settlor.
(3) Income treated as income of a beneficiary who is not a child of the settlor.
(4) Income applied in meeting expenses of the trustees properly chargeable to income (or which would have been but for the terms of the settlement).
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Gross up the payment
​- If the payment to the child is an annual payment (i.e. income) by UK resident trustees it will need to be grossed up (ITA s.493(3), specifically referring to payments treated as income of the settlor under ITTOIA s.629).
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Legislation: ITTOIA s.631;
Cases:
HMRC manuals:
Commentary: Chamberlain, §11.43;
See also:
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- Non-resident settlor: only UK source income is deemed to be the settlor's
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Exclusion of foreign source income from attribution
- If the settlor is non-UK resident, "income arising under a settlement" does not include income which the settlor, if actually entitled to it, would not be chargeable to tax (by deduction or otherwise) due to being non-resident (ITTOIA s.648(2)).
UK resident trust
- The UK resident trustees will be liable to tax on the foreign income - see above.
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Legislation: ITTOIA s.648;
Cases:
HMRC manuals:
Commentary: Chamberlain §11.21;
See also:
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- Exclusion for trust income given to charity
- Exclusion from attribution for qualifying income arising under UK settlement if the trustees give it to charity in the tax year when it arises or it is income to which a charity is entitled under the terms of the trust (s.628).
- Qualifying income is income that must be accumulated, paid at the discretion of a person or is income of a person other than the trustees.
- Apportion where payments to charity exceed qualifying income.
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Legislation: ITTOIA s.628;
Cases:
HMRC manuals:
Commentary:
See also:
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- Trust for disabled persons/minors who have lost a parent (income not attributed to settlor)
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- Income tax relief available
- Disapplication of the settlements charge based on benefits to minor children of settlor (FA 2005, s.28A; s.629(8));
Legislation: FA 2005, s.23 onwards;
Cases:
HMRC manuals:
Commentary:
See also:
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INCOME TAX (OTHERS: TRANSFER OF ASSETS ABROAD)
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Transfer of assets abroad
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- Capital payment triggering charge on transferor
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Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
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