Trust income: business profits
If trustees carry on a business, the profits are not ‘earned income’. This applies even where the trustees carry on the business through a beneficiary who is not a trustee.
If a beneficiary (or the beneficiary’s spouse) receives profits, they are not necessarily earned income. It depends on the involvement with the business. The profits are only earned income if the beneficiary and/or spouse actively conducts the business. It is not enough just to take a limited interest. It would not be enough to receive reports of progress, or appoint a manager.
A beneficiary may be an employee of the business. Any pay is earned income. Profits are not.
Fry v Shiels Trustees 6 TC 583
McDougal v Smith 7 TC 134