Interest in possession 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:

  • Interest in possession beneficiaries
  • The source of a beneficiary’s income
  • Calculation of the beneficiary’s income
  • The calculation of beneficiary’s income tax
  • Reporting the beneficiary’s trust income

This note deals with the main principles of income tax that apply to beneficiaries of an interest in possession trust.

An individual will be charged to income tax only where he is entitled to, or receives, income from a taxable source. For a beneficiary of an interest in possession trust, you need to ask: what is the source of the trust income to which he is entitled?

The source of a beneficiary’s income

The source of the income of a beneficiary of an interest in possession trust (constituted under the law of England and Wales) is the trust property itself, and not the right that is enforceable against the trustees to have the trust properly administered.

Archer-Shee v Baker 11 TC 749 (subscription sensitive)

A beneficiary is specifically entitled to the trust income that has not been used to defray the trustees’ management expenses. In other words he is entitled to the net income arising from the trust property.

In Scots law, the beneficiary of any trust has only a personal right against the trustees to have the trust properly administered and to demand payment of the income. However, for income tax purposes, a beneficiary of an interest in possession trust constituted under the law of Scotland is treated as if the trust had effect in English law as long as the trustees are all resident in the UK.

ITA 2007, s 464(1), (2)

This means that for income tax purposes all UK interest in possession trusts are treated in a uniform way. The rule in Archer-Shee applies for so long as the beneficiary has a vested interest in the income. It applies where:

  • the beneficiary is an adult and has a life interest in the

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