Payments to beneficiaries

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:

  • Payments to beneficiaries
  • Interest in possession trusts
  • Discretionary trusts
  • Income or capital distribution
  • Accumulated income
  • Settlor-interested trusts
  • Accumulation and maintenance (A&M trusts)
  • Capital payments

Interest in possession trusts

The income of an interest in possession trust belongs to the life tenant. The trustees can decide to pay income direct to the beneficiary as the income arises. Trustee expenses cannot be deducted from the mandated income. If all trust income is mandated to a beneficiary, there will only be a need to complete a tax return if the trustees make a capital gain. The beneficiary must then declare the income on their tax return and account for the tax. Alternatively the income can be paid when annual accounts have been prepared to show the exact amount due to the beneficiary.

The trustees will be subject to income tax as follows:

  • the dividend ordinary rate on dividend income
  • basic rate income tax on all other trust income
  • the trust rate or dividend trust rate as appropriate on trust capital treated as income

Documentation is not required for trustees to pay income to an interest in possession beneficiary as the entitlement to income is their right.

The date of payment of the income has no relevance for tax purposes. The tax year of receipt by the trustees is the tax year of assessment for the beneficiary.

The trustees will need to give the beneficiary a form R185 (Trust Income)  to show the trust income less expenses. See the Interest in possession beneficiaries guidance note.

Discretionary trusts

For beneficiaries of a discretionary settlement, income can either remain undistri

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