Mandated Trust Income – Interest in possession trust – Trust Tax Return

By Technical Team on 14 Aug 2017

For an interest in possession trust (typically one where there is a life interest so that the life tenant is entitled to the income) where the income is mandated to the beneficiary and all the remaining income not mandated has been taxed at source the wording of the SA900 Trust SATR states that the trustees do not have to there is no need to complete all the income details and the beneficiary can instead return the income directly on their personal SATR.  In such circumstances the trustees may request to be taken out of the SA regime for future years.

Essentially this is an administrative shortcut - the tax paid remains the same; but there is a time and costs saving for both the trustees and 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.”

Under the regimes applying since 6 April 2016 dividends and interest will usually be received gross, with the trustees being primarily liable for the appropriate tax rates (7.5% and 20% respectively).  However if the income is mandated to the beneficiary the liability passes to the beneficiary;  if the beneficiary does not declare the income and pay the tax the liability cannot fall back to the trustees.

Query put to HMRC

CIOT and ICAEW, in response to questions raised by members sought HMRC’s view as to what actually constitutes “mandated income”.  Our view is that (until it is revoked) any standing instruction given by the trustees as to the payment of income before it falls entirely under their control would constitute a mandate.  HMRC were asked to consider the following examples:

  1. The registrar of a company is given a mandate to pay the dividends directly to the beneficiary’s bank account
  2. The bank/building society is instructed to pay the interest as it arises into the beneficiary’s bank account
  3. The investments are held by an investment manager in nominee accounts the manager is instructed to pay the income as it arises into the beneficiary’s bank account
  4. The investments are held by an investment manager in nominee accounts and the manager has a standing instruction to pay the income periodically, say quarterly, into the beneficiary’s bank account
  5. The registrar of a company is given a mandate to pay the dividends directly to the trustees’ bank account and the trustees forward the income to the beneficiary
  6. The bank/building society is instructed to pay the interest as it arises into the trustees’ bank account and the trustees forward the income to the beneficiary
  7. The investments are held by an investment manager in nominee accounts and the manager is given ad hoc instructions to pay the income into the beneficiary’s bank account.
  8. Land where the life tenant manages the property including repairs, and collects and returns the rent directly

HMRC response

“In simple terms the IIP trust income is mandated to the beneficiary when the beneficiary will receive that income directly from the source.

So, any scenario where the trust income does not go via the trustees’ bank account, but straight to the beneficiary’s is one within TSEM 3763.  In these circumstances there is no basis for taxing the trustees, because they are not in receipt of the income.  The beneficiary is chargeable on the income because they are entitled to it.

The examples given in your question are all within the TSEM 3763, except numbers 5 and 6 where the trustees receive the income directly from the source, they are therefore taxable as being in receipt of the income.  They therefore include this on the Trust and Estate tax return (SA900).

The term ‘mandated’ has been causing the confusion so we are in the process of amending our guidance to clarify this matter.”

Technical Team