Jurisdiction(s):
United Kingdom

Accumulation of trust income: when it becomes capital, beneficiary tax treatment, Trustee Act 1925 s 31 minors, tax pool and IHT implications (England and Wales)

Published on: 31 January 2024

Published by a LexisNexis Private Client expert

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Article summary

See Q&A: At what point does income from a trust become accumulated and capital in nature, so that payments of the same funds are capital and the beneficiary cannot claim income tax back at their marginal rate?

For present purposes, assume the trust is discretionary and that nobody has an interest in possession in its income. Accumulation denotes the transformation of income into capital; once that has happened, any later payments out of those same sums are treated as capital, and the beneficiary cannot reclaim income tax at their marginal rate.

For income to be properly accumulated, certain requirements must be met:

there must exist a power or trust to accumulate, granted by the trust instrument or under the Trustee Act 1925 (TA 1925), or possibly arising at common law—see Lombe v Stoughton (1841) 12 Sim 304 (not reported by LexisNexis®UK)

There is also statutory authority to accumulate income from funds held for a beneficiary who is a minor, to the extent that the income is not applied towards his maintenance (TA 1925, s 31) (see below)...

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