Do Discretionary Trustees Need To Act On Undistributed Trust Income?

Discretionary trustees should consider whether it would be advantageous to distribute trust income that has arisen more than five years before the next inheritance tax ("IHT") ten year anniversary of their trust. The reason for this is that the Government is going to change the way in which the IHT ten year anniversary charge applies to undistributed income that, as at the ten year anniversary, has been in the trust for more than five years. The change will apply in respect of ten year anniversaries occurring on or after 6 April 2014.

Under English trust law discretionary trustees have power to apply the trust income for the beneficiaries or formally to accumulate such income by resolving to hold it as part of the capital. Accumulated income is treated for tax and trust purposes as capital.