Accumulating Income

24.A38. The foregoing rules do not deal with the case where income is accumulated. There are limitations in most jurisdictions on the extent to which income can be accumulated but some tax-haven countries have deliberately removed such limitations. To the extent that accumulation is permitted, the policy of levying duty at least once each generation is open to defeat since all the recommendations above depend on income being distributed.

24.A39. An estate may include non-income-producing assets such as works of art and land suitable for residential development purposes, or the gross income produced by or derived from an asset may be exactly set off by interest on borrowings or other outgoings. The concepts of income and outgoings can be defined by the relevant trust instrument in such a way that, though there is income for income tax purposes, there is no income for trust law purposes. A trust may have been established by a settlor with a view to deriving gains of a capital rather than of an income nature. The capital gains could be distributed to beneficiaries by means of distributions from time to time out of corpus. If the estate is wholly comprised of such assets, the rules suggested in paragraphs 24.A27–24.A37 will not be effective in relation to that estate.

24.A40. The Committee recommends that where during a relevant period (defined later) the trust has derived income and the income has not been wholly distributed during that period, the assets of the trust, or an appropriate part, should be brought to tax at the end of the relevant period. The fraction will be that part of the estate which is not brought to tax during the relevant period. Assume, for example, that a trustee has a discretion to accumulate the income or to make distributions to A or B during A's life and the trustee has, at all times, distributed one-third of the income to A and accumulated the balance. If A dies during the relevant period, one-third of the estate will be brought to tax on the death of A under the rule in paragraph 24.A37 and, at the end of the relevant period, the remaining two-thirds will be taxed. Alternatively, if A dies after the end of the relevant period, the whole estate will be brought to tax on the expiration of the relevant period. One-third will again be taxed on A's death, but here quick-succession relief will be available.

24.A41. In the case of a trust which, at any time during a relevant period, has held assets belonging to the class of assets described in the first sentence of paragraph 24.A39, the following rules should be applied:

  • (a) If a beneficiary who is a life tenant or who has an interest for the life of another has had the use or benefit of the asset during the term of his interest, the asset should be taxed on the expiry of his interest, or on a prior dealing, in the same way that it would have been taxed had the beneficiary received income from the asset.

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    (b) In any other case, the whole or part of the asset should be brought to tax at the end of the relevant period. Tax should be levied on that part of the asset not brought to tax during the relevant period.

A beneficiary should be regarded as having the use and benefit of an asset if the asset is dealt with or used in accordance with the beneficiary's directions.

24.A42. In the case of trusts existing when any legislation giving effect to these recommendations comes into force, the first relevant period referred to in paragraphs 24.A40–24.A41 should be twenty-five years from date on which the legislation comes into force. In the case of trusts arising after any such legislation comes into force, the first relevant period should be twenty-five years from the date on which the trust comes into existence. The second relevant period would commence on the day following the last day of the first period and so on, each relevant period being twenty-five years. If the trust comes to an end and all the assets are distributed during any such period of twenty-five years, then the relevant period should end on that day. However, the deemed disposal should be part only of the fraction mentioned above, such part being: (number of years and fractions thereof in the relevant period) divided by 25.

24.A43. Rate of duty on assets brought to tax by virtue of the provisions recommended in paragraph 24.A40 and under (b) in paragraph 24.A41 should be set sufficiently high to discourage the use of trusts as a means of avoiding tax.