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HMRC internal manual

Trusts, Settlements and Estates Manual

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

Compensation for receipts from indirect demerger

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

Shares received by trustees in a direct demerger are classified as capital. However it has been held that if the company has structured the demerger as an indirect demerger, the shares are classified as trust income. The Trusts (Capital and Income) Act 2013, Section 2 simplifies the position by classifying all shares on a tax exempt demerger as capital.

The Trusts (Capital and Income) Act 2013, Section 3 gives trustees power to use capital to compensate an income beneficiary for any disadvantage to them arising out of the treatment of demerger shares as capital. Income beneficiary in this context includes a beneficiary entitled to trust income and a discretionary beneficiary. Where trustees make a payment to a beneficiary in compensation for loss of income, HMRC has agreed that the payment should be treated as capital in the hands of the beneficiary.