Discretionary Trust - Distribution of royalties...

...to beneficiaries - Tax treatment

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Dear Aweb community,

I would like to do some reading around the tax treatment of royalties paid to the beneficiaries.

Could you point me toward the articles I need to read to understand the implications please?

I appreciate your support.

Replies (11)

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By Tax Dragon
17th Jun 2022 10:21

Do you know the implications of distributing income other than royalties to discretionary beneficiaries?

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Replying to Tax Dragon:
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By More unearned luck
17th Jun 2022 10:49

The way I read the question was that the beneficiaries own an intellectual property that the trust is making use of. But I'm a pendant.

The income of discretionary trusts loses its character when distributed - the beneficiaries merely receive trust income.

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Replying to More unearned luck:
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By Tax Dragon
17th Jun 2022 11:00

More unearned luck wrote:

The way I read the question was that the beneficiaries own an intellectual property that the trust is making use of. But I'm a pendant.

The income of discretionary trusts loses its character when distributed - the beneficiaries merely receive trust income.

And I'm a charm. I read the question having read the heading, so interpreted it differently. (Respondents not realising what had been asked is one of the many reasons that answers in here can be highly unreliable.)

I know re character - hence my question. Is OP asking to be pointed to a course on trust taxation, or is the question adequately answered with "usual rules apply"? (Or, as you say, is that not the question at all?)

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Replying to Tax Dragon:
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By Cylhia66
17th Jun 2022 11:34

My mistake. I should have said treatment of Income distributed to beneficiaries.

I'm wondering which HMRC articles I can read on the matter: Taxation on distributions made to beneficiaries.

All I can find is this but I'd like more details:
"5.6.3 Income and capital receipts in trust law15: If trustees’ receipts are
capital in trust law then in most cases they are not taxable at the special
trust rates, nor are they taxable at the marginal rates of an income
beneficiary. Instead, they are taxable at the basic rate of Income Tax,
or at Capital Gains Tax rates, both significantly lower than the special
trust rates and the higher rates for individuals. This difference in rates
of taxation can lead to disputes as to whether a receipt is income or
capital in trust law. This can result in an outcome that is not neutral in
comparison to other taxpayers who would not have the same
considerations when classifying income and capital. "

Page 16
https://assets.publishing.service.gov.uk/government/uploads/system/uploa...

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Replying to Cylhia66:
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By Tax Dragon
17th Jun 2022 12:00

Then I suggest you read Ch 7 of Pt 9 ITA 2007 (including s497). I'd also recommend https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-... and https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-... (and all that these lead to*).

* Well, you can ignore the "entitled to income" pages that hang from TSEM3750 - a discretionary ben obviously has no such entitlement. But look all the way down the list, in case they flipflop.

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Replying to Cylhia66:
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By More unearned luck
17th Jun 2022 12:26

"If trustees’ receipts are capital in trust law then in most cases they are not taxable at the special trust rates..."

How true is this assertion by HMRC? Section 482 has a long list of receipts that are mostly capital in trust law but are to be taxed at the special trust rates.

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Replying to More unearned luck:
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By Tax Dragon
17th Jun 2022 13:01

Good spot (I hadn't actually bothered reading the quote provided... cue allegations of hypocrisy from jcurran...).

That said, it could well be true - I'd happily believe that most (as in numerically more than half of) capital receipts are not on that long list.

I'm struggling more with the subsequent statement: "instead, they are taxable at the basic rate of Income Tax..."

As you well know, items that are on the s482 list are taxed at trust rate even in an IIP trust - and then it's pretty much dead money. The IIP ben is typically not entitled to the receipt because it's not income, and there's normally no income to pay using discretionary powers (utilising the tax pool) because the IIP ben is entitled to it. (See s498 - inc ss2A - re inclusion in tax pool.)

You make a very subtle point though... I referred to Ch 7; you refer to s482; s482 is in Ch 3. If OP is serious about learning the rules, they need to read the whole of Part 9.

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Replying to Tax Dragon:
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By Cylhia66
17th Jun 2022 13:00

Thank you both. Much appreciated. I am as serious I can be about learning on this subject. I'll check out the links you shared asap.

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Replying to Cylhia66:
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By More unearned luck
17th Jun 2022 17:14

The problem TD identifies can sometimes be avoided by appointing the 'income' producing asset to the beneficiaries before the 'income' arises.

Sometimes it makes a difference whether the settlor is quick or dead.

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Replying to Tax Dragon:
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By Hugo Fair
17th Jun 2022 11:37

I see myself as more of a bracelet ... oh no, they've turned into handcuffs!
Maybe I'd better lower my sights and work towards being a single cuff-link.

FWIW I worked out why you asked the question ... and await an answer from OP.
EDIT: which I see has arrived whilst I practised my typing!

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Replying to Hugo Fair:
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By Tax Dragon
17th Jun 2022 11:52

Oh the fun to be had with a stray N :-)

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