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HMRC internal manual

Trusts, Settlements and Estates Manual

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HM Revenue & Customs
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Trust income and gains: beneficiaries: payment from trust capital - normally capital in beneficiary’s hands

A payment made out of trust capital including

  • accumulated income
  • a capital receipt that is deemed to be income for tax purposes

is normally regarded as capital of the beneficiary and so is not taxable. This view was supported in the case of Stevenson v Wishart and Others (59 TC 740).

Where

  • there is no pre-existing interest in income, or
  • the payment is made under an interest in capital that is separate from an interest in income
  • payments out of trust capital constitute capital in the hands of the recipient.

Examples that illustrate the normal rule are:

  • Anthony has no interest in income at all. But the trustees may advance capital to or for him at their discretion. Payments are capital and not taxable on him.
  • Barbara has a discretionary interest in income. The trustees may also advance capital to or for her at their discretion. Payments are capital and not taxable on her.
  • Carina has an annuity of £10,000 and in addition, the trustees have the power to apply capital at their discretion for her benefit. Payments are capital and not taxable on her.