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HMRC internal manual

Trusts, Settlements and Estates Manual

Trust income and gains: beneficiaries: payment from trust capital - compensation treated as income

Compensation for receipts from enhanced stock dividend

A payment out of trust capital to compensate an income beneficiary for loss of income may constitute income in the hands of the beneficiary.

SP4/94 describes the situation where an enhanced stock dividend is regarded as trust capital but an adjusting payment is made to the beneficiary with an interest in possession because the beneficiary is entitled to some compensation from the trustees for the cash dividend foregone. The payment made to the beneficiary is an annual payment and the beneficiary is treated as receiving income taxable under Chapter 7 Part 5 of ITTOIA 2005 on which income tax at the basic rate has been paid.

This treatment applies whether the payment is made out of the proceeds of the disposal of the enhanced stock dividend or out of other capital of the trust.