I act for a discretionary trust which has undistributed income arising over several years - but always recorded as such in the trust accounts. Although the trust deed allows accumulation, no formal decision to accumulate has ever been made. A large "tax pool" has accrued. The income has now been distributed.
HMRC state that any undistributed income, year by year, becomes accumulated income and therefore a capital receipt when distributed to any beneficiary.
In this case the beneficiary is a non-taxpayer who, if the distribution is treated as income and an R185 issued, could recover most of the tax certified on the R185. The distribution was entered at Q.14 in the trust tax return.
I'm a bit wary about issuing an R185 to the beneficiary. We're talking about a potential £10,000 tax recovery.
Can I issue an R185 ? At what point does a discretionary trust's undistributed income become "accumulated" and therefore transformed into capital when distributed ?