#2411 - Income Tax - Tax Law

Income Tax exam notes: trusts and settlements (general)

• Income which arises from the trust assets is, as a general rule, treated as income of the trustees and not that of the settlor. Neither are the trustees agents for the beneficiaries. Trustees are chargeable to income tax because they receive the income (in the sense that they may sue for it and may be said to receive it), even though the beneficiaries may be entitled to it. It makes no diff if there is only one beneficiary and he is sui juris.

• The beneficiaries will be assessed to income too, on any income received from the trust, but this will take into account any income tax already paid by the trustees.

Taxing trustees

When is the trustee assessable?

1. Where trustees accumulate income.

2. Trustees expenses

3. Where one or both of the beneficiaries is non-resident.

• S271 ITTOIA: the person liable for any tax charged under this Chapter is the person receiving or entitled to the profits.

• S404: the person liable for any tax charged under this Chapter is the person receiving or entitled to the dividends.

• Have to decide whether to tax trustee or beneficiaries. If the former, then can tax them qua trustees or as if they were the beneficiaries. We don’t go for representative liability.

• Exceptions to this general position:

• S72 TMA: Trustees, guardians, etc. of incapacitated persons: the trustee, guardian etc of any incapacitated person (including children) having the direction, control or management of the property or concern of any such person, whether such person resides in the UK or not, shall be assessable and chargeable to income tax in like manner and to the like amount as that person would be assessed and charged if he were not an incapacitated person.

• S76 TMA: if the trustees allow the beneficiaries to receive income. As regards assessment of the beneficiary just need to give details to Revenue.

Problems

• Trustees are usually said to be taxable on income in respect of which they are in ‘actual receipt or control’: Williams v Signer. The case posed the question whether trustees resident in the UK for a non-resident beneficiary were liable to UK income tax on income from a non-UK source as ‘any persons residing in the UK… for and in respect of the gains accruing from any kind of property.’

Williams v Singer

• The trustees of a marriage settlement, who were UK resident and domiciled, were assessed on income arising to the settlement of shares in a US co. The beneficial life tenant in possession was the Princesse de Polignac who was a French subject by marriage and resident and domiciled outside the UK. The major part of the income was from shares in the Singer Manufacturing Co registered in the name of the trustees. The whole of that income was mandated by the trustees to the Princesse and the dividends were paid directly to her account at a bank in New York. None of the income was received in the UK.

• Viscount Cave

• The fact is that if the Income Tax Acts are examined, it will be found that the person charged with tax is neither the trustee nor the beneficiary as such but the person in actual receipt and control of the income which it is sought to reach. The object of the Act is to secure for the State a proportion of the profits chargeable, and this end is attained by the simple and effective expedient of taxing the profits where they are found. If the beneficiary receives and controls them he is liable to be assessed upon them. if the trustee receives and controls them, then he is primarily so liable.

• Accordingly, his opinion was that the trustees were not assessable. Lords Atkinson and Shaw concurred. This new approach was followed in Kelly v Rogers where the UK resident trustee under a New Jersey will for his incapacitated sister was held properly assessable.

Kelly v Rogers

• The beneficiary was UK resident but was domiciled in New Jersey. However, she was a person under an incapacity. Trust funds had been established to provide for her maintenance; any balance was to be accumulated. The trustee was the beneficiary’s sister. The trustee, Mrs Rogers, was married to an Englishman and was UK resident and English domiciled. If Miss Wilmer, the beneficiary, had not been incapacitated, she would have been able to claim the benefit of what is now s65TA, the non-UK domiciliary remittance basis. However, it was held that as her sister Mrs Rogers was in actual receipt and control of the income and she was UK resident the whole of the income was assessable to UK income tax on an arising basis.

• Shipwright and Baldry: this does not give any clear theoretical basis for the taxation of trustees. See Lord Sands in Reid Trustees: “it was found that the substance of the matter and not any more thereby was to be regarded.”

Reid Trustees

• the result of Williams and Singer the Lord President thought came to this, that in a great many cases the trustees are the right persons to asses.

• Shipwright and Baldry: would the HL have decided Williams v Singer differently?

At what rate are the trustees taxable?

• General rule: trustees are liable to basic rate tax only.

• S11 ITA: income tax is charged at the basic rate on the income of persons other than individuals.

Fry v Shiel’s Trustees

• Lord Sherrington: the words “individual” and “income” as used in the sub-section do not include the case of a trustee or of a body of trustees legally vested in a trust estate.

Accumulation Trusts: the ‘trust rate’

• Non-discretionary trusts: trustees are not liable to income tax at the higher rate as they are not individuals.

• Discretionary trusts: trustees are liable to the rate applicable to trusts’- where the income is to be accumulated or is payable at the discretion of the trustees or any other person (whether or not there is a power to accumulate).

• the ambit of the predecessor provision to ITA 2007 ss479, 480 was considered in IRC v Berrill where the settlor’s son was entitled to the income from the fund unless the trustees exercised a power to accumulate it. Vinelott J held that the section applied since the income was ‘income… which is payable at the discretion of the trustees.’ ‘Discretion’ is wide enough to cover a discretion or power to withhold income.

• the rewritten legislation makes it absolutely clear that accumulated income refers to income which the trustees are under a positive duty to accumulate. A mere power to accumulate is not sufficient, although it will usually mean that the income ‘is payable at the discretion of the trustees’ within para (b).

Income Tax Act 2007

s9 The trust rate and dividend trust rate (from 2010/2011)

• The trust rate is 50%.

479 Trustees’ accumulated or discretionary income to be charged at special rates

• This section applies if—

  • accumulated or discretionary income arises to the trustees of a settlement, and

  • the income does not arise under a trust established for charitable purposes only.

• Income tax is charged on the income at the rates referred to in this section instead of at the rates which would otherwise apply.

• Otherwise, income tax is charged on the income at the trust rate.

480 Meaning of “accumulated or discretionary income”

• Income is accumulated or discretionary income so far as—

  • it must be accumulated, or

  • it is payable at the discretion of the trustees/ any other person, and it is not excluded by subs (3).

• The cases covered by subsection (1)(b) include cases where the trustees have, or any other person has, any discretion over one or more of the following matters—

  • whether, or the extent to which, the income is to be accumulated,

  • the persons to whom the income is to be paid, and

  • how much of the income is to be paid to any person.

• Income is excluded for the purposes of subsection (1) so far as—

  • before being distributed, it is the income of any person other than the trustees,

484 Trustees’ expenses to be set against trustees’ trust rate income

• This section applies if the trustees of a settlement incur allowable expenses in a tax year.

• The allowable expenses are to be set against the trustees’ trust rate income for the current tax year in accordance with section 486.

491 Special rates not to apply to first slice of trustees’ trust rate income

• If the trust rate income for a tax year of the trustees of a settlement is 1,000 or less, income tax is not charged on it at the dividend trust rate or at the trust rate.

• If the trustees’ trust rate income is more than 1,000, income tax is not charged on the first 1,000 of it at the dividend trust rate or at the trust rate.

• Instead, income tax is charged on the trustees’ trust rate income or the first 1,000 of it (as the case may be) at the rate or rates which would apply apart from Chapter 3 (see Chapter 2 of Part 2).

466 Meaning of “settled property” etc

• This section applies for the purposes of the Income Tax Acts, except so far as, in those Acts, the context otherwise requires.

• “Settled property” means any property held in trust other than property excluded by subsection (3).

• Property is excluded for the purposes of subsection (2) if—

  • it is held by a person as nominee for another person,

  • it is held by a person as trustee for another person who is absolutely entitled to the property as against the trustee, or

  • it is held by a person as trustee for another person who would be absolutely entitled to the property as against the trustee if the other person were not an infant/ otherwise lacking legal capacity.

• A person is absolutely entitled to property as against a trustee if the person has the exclusive right to direct how the property is to be dealt with (subject to the trustees’...