Accumulating income

By Tolley
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The following Trusts and Inheritance Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Accumulating income
  • Introduction
  • The rules against excessive accumulations prior to 6 April 2010
  • The rules against excessive accumulations from 6 April 2010
  • Application of the rule against excessive accumulations to the administration of trusts

Introduction

To prevent assets being tied up in trust indefinitely, the Courts developed the rule against perpetuities (which prevents trusts lasting for more than a set period) and, hand in hand with this, the rule against excessive accumulations of income. Broadly speaking, that latter rule prevents income from being accumulated (ie not paid out to beneficiaries) beyond a defined period, known as the accumulation period.

The rule against excessive accumulations first developed following the case of Thelluson v Woodford, and was given statutory form under the Accumulations Act 1800 and then the Law of Property Act 1925 (repealed by the Perpetuities and Accumulations Act 2009 (subscription sensitive). However, by the end of the last century it was becoming apparent that compulsory restrictions on accumulations of income were somewhat outdated, and the Law Commission recommended far reaching changes in 1998.

Thelluson v Woodford (1799) 1 Ves 112 (subscription sensitive)

The Perpetuities and Accumulations Act 2009 (subscription sensitive) came into force on 6 April 2010. This introduced a new 125 year perpetuity period for trusts created after that date, and afforded trusts that existed prior to that date an opportunity to opt for a fixed 100 year perpetuity period where the original period was defined with reference to lives in being, and the trustees could prove that it was difficult to ascertain whether the relevant lives in being had ended. The more important provision, for present purposes, is that the automatic restrictions on the accumulation of income were removed for trusts created after 6 April 2010, meaning that income can be accumulated throughout the trust period if so desired. It does, however, remain open to settlors and testators to impose provisions for the accumulation of income if they so wish.

Practitioners need to be aware of both the old rules, which will apply to trusts created prior to 6 April 2010 and

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