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Closing a discretionary trust

Closing a discretionary trust

I wonder if anyone on AWeb can put me straight. I'm a trustee of a discretionary trust which has sold its last property and is to be wound up. The sole beneficiary is domiciled and resident in US and has been for 25 years plus. For various reasons, there have been no income distributions and the accumulated net income is £56,000. The trust has total assets of £250,000.Tax pool is £16,500. Is it possible to release just sufficient as income to use up the tax pool and then just distribute the balance as capital? Or do I have to make an income distribution of the entire accumulated income? If the latter, this will give rise to an Income Tax liability because the tax pool is insufficient. Can that tax liab be deducted from the accumulated income total so that I can demonstrate that the entire accum income has been distributed? As you may see, I've not had to handle this type of situation before. Any help would be much appreciated.


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23rd Aug 2013 16:19

I think your proposal works

If there was no power to accumulate income in the Trust Deed then the income can only ever remain as undistributed income.  But if, as seems likely, the trustees do also have power to accumulate income, they can choose to do so and that income becomes additional capital of the trust. If, in later years, the trustees distribute some of the accumulated income to the beneficiaries the payment is a capital distribution, and not an income distribution. Beneficiaries are not taxable on capital distributions.

Revenue manuals, commenting on what may be chargeable for IHT purposes say:-

When income is accumulated it is converted to capital at that date. It becomes relevant property and is within our claims for tax. As it becomes capital at a date later than the settlement date, accumulated income invariably attracts relief under IHTA84/S66 (2) 

Where income on hand has not been accumulated, it is undistributed income. Thus it is not capital, it is not relevant property, it is excluded from any inheritance tax charge and it is usually not included in the IHT100. 

See IHTM42224

Whether the trustees have to minute their decision to accumulate or whether after a year, say, of non-distribution, it simply becomes capital, I am unsure, but if you google "Bob Sheasby accumulations of income", you will come up with an excellent article on the website, which I think will give you the answers.

My feeling is that you can do what you propose regarding just distributing sufficient income as will use up the tax pool & distributing the rest as capital (assuming power to accumulate was there).  I've certainly done just that in the past, seeing no other logical way!  However, if a lot has become capital, might there be IHT ramifications instead? Probably not with these amounts...


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28th Aug 2013 13:27

Thank you very much for your guidance on this. I have since spoken to HMRC Trusts Dept who, very helpfully, confirm that accumulated income becomes capital to the extent that it is not ultimately distributed as such. I think the IHT position is clear. Once again, my thanks to you, Susanna.

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