The following Trusts and Inheritance Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:
Trustees exercise their dispositive powers by making payments to beneficiaries. The extent of the trustees’ powers is determined by the trust deed. Often the settlor will have specified different rules for capital and income and trustees must adapt their discretion accordingly. Common options include:
beneficiary is given the right to income for life, or a fixed period, after which the capital passes to residuary beneficiaries
beneficiary is given the right to income for life, and the trustees also have discretion to pay him portions of capital as needed. After his death, both income and capital are distributed at the trustees’ discretion
a fully discretionary trust under which the trustees may appoint capital as they think fit and, in the meantime, they may distribute or accumulate the income
a fixed interest trust, often established for young people, under which the beneficiaries become entitled to a fixed share of both capital and income pending the attainment of a specified age and, in the meantime, the trustees may distribute portions of each beneficiary’s share as the need arises
It is possible to have almost any combination of beneficiary entitlements, and thus trustee dispositive powers. The foremost concern for trustees and their advisers is to ensure that they know what their options are and that they are acting within the terms of the trust. It goes without saying that to do so effectively, they must have a reliable financial record which distinguishes between capital and income.
When considering payments to beneficiaries, trustees should first ask themselves the following:
is it capital or income?
how much discretion do we have over the amount to be paid?
what are the tax consequences of making these payments?
Trust capital comprises the original trust fund, investments purchased with it and gains on those investments. It is reduced by capital losses, expenses relating to the maintenance of the capital and capital taxes. It can be increased by income which has
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