Treatment of Trusts
23.45. As in the case of capital gains derived by companies, the Committee sees no reason for treating capital gains derived by a trust estate in a markedly different manner from the treatment of capital gains derived by an individual. The same proportion of the gains should be included in the income of the trust estate as would be the case with a capital gain realised by an individual taxpayer. However, particular problems arise in apportioning the liability of the tax on a capital gain between the beneficiaries entitled to the income from the trust estate and those who will ultimately be entitled to the capital of the estate. Capital gains will not generally be income according to trust law principles and, unless the terms of the instrument creating the trust estate direct otherwise, will not be available to those beneficiaries entitled to income: they will become accretions of the capital of the trust estate and will enure ultimately to those beneficiaries who take the capital. This being so, it would be unfair as a general rule to impose a tax liability on the income beneficiaries. On the other hand, the identity of the capital beneficiaries is often unknown at the time the capital gain is realised and it is thus impossible to levy the tax directly on them. Accordingly, the Committee recommends that as a general principle the tax be levied on the trustee. It will then be for the trustee to apportion the liability between income and capital beneficiaries in accordance with general principles of trust law and with the terms of the instrument creating the trust.
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23.46. The determination of an appropriate rate of tax will pose difficulties. In Chapter 15 (paragraph 15.34) a special rate of tax of less than 50 per cent is recommended to apply where income is taxed to the trustee because income for tax purposes exceeds income calculated in accordance with trust law. In the Committee's view, it is appropriate to apply this special rate to the half of capital gains taxed to the trustee, except where a lower rate is determined in accordance with paragraph 23.47 or a lower rate is applicable to income taxed to the trustee in accordance with paragraphs 15.33–15.35 (which refer to estates in the course of administration or certain trusts whose income is being accumulated for minor children).
23.47. Where a beneficiary is absolutely entitled to both income and corpus, or the present entitlement of an income beneficiary includes the capital gain, and the beneficiary so elects, the rate of tax should be determined on the basis that half the gain has been added to and is subject to tax as the top slice of the income of the beneficiary. This exception will cover the case where the beneficiary is an infant who is entitled to both income and corpus and the case of a bare trust. It will apply where the trust instrument defines trust income in a way that will include capital gains.
23.48. The transfer of an asset by the trustee to a beneficiary should be treated as a deemed realisation of the asset for purposes of capital gains tax. There should also be a deemed realisation on any occasion when a fraction of the trust assets falls to be included in the estate of a deceased person or is deemed to be disposed of for gift duty purposes. And there should be a deemed realisation on the expiration of each period of twenty-five years referred to in paragraph 24.A42.
23.49. Because of the complexities involved, the Committee does not propose that there should be carry-back of capital losses suffered by a trust. Nor should there be any application of capital losses against income of a trust. Generally, unrecouped capital losses will cease to be available on the termination of a trust. To this there should be one exception. Where a beneficiary who, at the time of the loss, was absolutely entitled to income and corpus receives the corpus of the trust, any unabsorbed capital losses of the trust should be transferred to him.
23.50. Except in one situation, income losses should not be applied against capital gains. The exception proposed is where there are income losses unabsorbed at the termination of a trust. These losses should be applicable against capital gains that arise in the winding up of the trust and the transfer of assets to beneficiaries.