Trusts and mandated income

Trustees frequently have the income of life interest/interest in possession trusts paid directly to the beneficiary.

Where the income is mandated, the trustees can avoid completing the trust self assessment tax return. The return asks if the income is mandated to the beneficiary and if all the remaining income not mandated has been taxed at source. If so there is no need to complete the SA900 and the beneficiary can instead return the income directly on their personal tax return.

Following the changes to the taxation of dividends and interest, trust income is generally being paid gross and so the question has arisen as to what is meant by mandated income in connection with the completion, or not as the case may be, of the SA900.

In essence this is an administrative shortcut  - the tax paid remains the same; it saves time and costs for the trustees and for HMRC.

TSEM3763 states: “Sometimes the trustees mandate trust income to a beneficiary. If the trustees mandate income to a beneficiary, it means that the beneficiary receives it and the trustees do not. So in such a case there is no statutory basis (see TSEM3761) for taxing the trustees as being in receipt of the income. The beneficiary both receives the income and is entitled to it.”

The query has arisen now as dividends and interest received on trust income will be in the main paid gross, and the trustees are primarily liable for the tax. If the income is mandated to the beneficiary the liability passes to the beneficiary as per TSEM3763, so in the event the beneficiary does not declare the income and pay the tax the liability cannot fall back to the trustees.

We asked HMRC to confirm for various scenarios what they treated as mandated income. In very simple terms provided the income goes to the beneficiary without passing through the hands of the trustees it will be mandated income. 

The full response from HMRC is in TAXguide 13/17.

  • What is the situation as regards the new trust register? Does the IIP trust, which has all income directly mandated to the beneficiary and has no obligation to file a tax return, escape the meaning of a taxable trust, and so avoid the obligation to enter details on the register?