Accumulating income

Produced by Tolley
Accumulating income

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

  • Accumulating income
  • Power to accumulate income
  • Fully discretionary trust
  • Accumulation for a fixed period
  • Fixed interest trust
  • Rules against excessive accumulations
  • Rules against excessive accumulations before 6 April 2010
  • Rules against excessive accumulations from 6 April 2010
  • Statutory rules of accumulation and maintenance for minors
  • Distinction between accumulated and undistributed income
  • More...

Power to accumulate income

Where trusts hold financial investments, they will produce income. The trustees must deal with that income in accordance with the directions in the trust deed. There may be a direction, or an option, to accumulate income, which means that income is not paid out to beneficiaries as it arises but it is saved up, reinvested and added to the capital of the trust fund for future use.

Settlors may include a direction to accumulate income for a specified period. Their motivation for doing so might be to increase the total value of the trust fund over time, although current income tax rates tend to mitigate against this aim. They may also choose accumulation to ensure that all of the trust fund is preserved until the beneficiaries reach a certain age or stage in their lives.

More commonly, a trust deed will include an option to accumulate giving the trustees the power to decide on an annual basis whether to accumulate some or all of the income or to distribute it. This shifts the responsibility to trustees to make judgments about the best use of the trust fund.

Alternatively, trustees may have neither the power nor the obligation to accumulate income but are instead directed to distribute the income as it arises. This is the situation with an interest in possession: the named beneficiary has a right to the income and consequently the trustees have no right to accumulate it. It is also possible for trustees to have discretion over how the income is distributed (ie no interest in possession) but no right to accumulate it. In other words, the trustees must distribute the income but they can decide how it is to be shared out.

The extent of the trustees’ power to accumulate income is to be found in the trust deed. The directions included therein may be augmented by certain standing statutory provisions as described below. The power to accumulate may be expressed in

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