IHTM42224 - The settlement: powers of accumulation

Investigation

In every case where an accumulation power might be material you should check

• that there is a power of accumulation in the deed and
• that it was exercisable at any relevant date.

The importance of accumulations generally is that when income is accumulated it is converted to capital at that date. It becomes relevant property and is within our claims for tax.

As it becomes capital at a date later than the settlement date, accumulated income invariably attracts relief under IHTA84/S66 (2).

Where income on hand has not been accumulated, it is undistributed income. Thus it is not capital, it is not relevant property, and it is excluded from any inheritance tax charge.

(This text has been withheld because of exemptions in the Freedom of Information Act 2000)

Accumulation periods

A definite ‘perpetuity’ period must be set in every trust (except Scottish trusts - see below). Parliament acts against locking money away from circulation for excessive periods.

There are six permitted periods at English Law. The most common period used in lifetime discretionary trusts is 21 years from the date of settlement.

The periods prescribed under Law of Property Act 1925/S164 are

• The life of the settlor. In lifetime settlements this is the period usually adopted when no other period is specified.
• 21 years from the death of the settlor/testator. This is the period usually adopted in will trusts where no other period is specified.
• The duration of the minority, or respective minorities, of any person(s) living or en ventre sa mere at the death of the settlor
• The duration of the minority or respective minorities of minor beneficiaries who, if of full age, would be entitled to the income

The further two periods are prescribed by Perpetuities & Accumulations Act 1964/ S13 are

• A term of 21 years from the creation of the settlement
• The duration of the minority or respective minorities of any person(s) in being when the settlement is created, whether or not they are beneficiaries or have any other connection with the settlement.

Minors

If the income is payable to a minor at the end of the prescribed period the income can still be accumulated until the beneficiary attains majority (age 18): Trustee Act 1925/ S31(2). The accumulation period in such a case can therefore be longer than the prescribed period.

After the accumulation period

If a trust power provides for accumulations for a period which is longer than the prescribed period it is not wholly void but is void as to the excess length of time.

When the accumulation period expires the trustees must not accumulate income after that date but must deal with it as the terms of the settlement direct.

You should note that in many jurisdictions such as the Channel Islands and Caribbean ex- colonies, the old common law rule is followed. The result is that the trustees have power to accumulate during the perpetuity period.

The terms of the settlement at the end of the accumulation period will vary. The two most likely results are

• the income may continue to be subject to the trustees’ discretion, in which case the trusts are still ‘discretionary’, or
• the accumulation power might have been the only thing standing between the objects and an interest in possession. On the accumulation power ceasing, the interests would vest and accordingly a claim under IHTA84/S65 (1)(a) would arise.

Scottish Law

Scottish Law does not have any rules against perpetuities. There are also some differences regarding minors and unborn persons. ( IHTM42700)

Distributing, storing or earmarking income

There is no such thing as an implied power of accumulation, except in the sense that

• accumulation is not specifically mentioned but the trustees are directed to hold income until a specified date, for example the tenth anniversary of the millennium or,
• where the trustees have power to apply whole or part income for the maintenance or benefit of a beneficiary and they have no power to pay income to anyone else. No part must be accumulated.

The trustees have a reasonable period in which to consider what to do with the income, and this period depends on the facts of the case. Refer to Re Gulbenkian’s Settlement Trusts No.2 [1970] Ch 408

Where trustees have no power to accumulate, all income is undistributed income and outside our claims.

Income is either distributed/undistributed or accumulated. Although it can be ‘stored up’ in the form of undistributed income for quite long periods it cannot, at the same time, be said to belong to the class of objects as a group and ‘earmarked’ only for some or all of them, thus permitting the trustees to buy capital assets which are outside the terms governing the capital of the settlement.

The concept of ‘earmarked’ undistributed income offends against the idea of discretionary trusts. The trustees’ ability to pay/distribute lies in the trusts or powers of the deed and they must act under those trusts/powers. Until a positive exercise of the discretion has been made, the objects are in no better position than before; they are entitled to be considered.