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Undistributed trust income

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 ?


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Thanks, abacus
Much obliged to you for these comments. In my clients' case the Trustees have discretion over whether to accumulate.

I'll go ahead with the R185 and make sure the full facts are disclosed to the repayment tax area office.

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The deed, the Deed
Hello, we now seem to have HMRC overriding the wording of a legal document, do we ?
As you use the word "allow", Morris, I have to assume that the original Deed did not stipulate (as some do ) that any income undistributed MUST be accumulated. I once dealt with a discretionary trust that gave trustees the option and an "undistributed income account" was opened and credited whenever the trustees resolved not to accumulate as capital any income that might not have been paid out during the year.
After some years, there was a distribution and I had no compunction in using what also was a large tax pool and issuing an R185 in line.
There was no comeback on this which I apprecioate is not 100% proof of official acceptance but I was prepared to argue that no Inspector could ignore what a validly executed Deed stated.

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