From the First Tier Tribunal

Corporate distributions – capital or income

It is important for trustees to decide whether their receipts should be treated as being of an income or capital nature. In the case of the traditional life interest trust, the question decides whether the receipt belongs to the life tenant. In the case even of discretionary or accumulation trusts, the answer may not directly affect the beneficiaries, but it will very probably decide the trustees’ tax liabilities. The preponderance of case law suggests that distributions by companies, will usually have the quality of income rather than capital, and this is re-inforced by tax legislation specifying distributions which may appear to have the quality of capital but are nevertheless to be regarded, like dividends, as income. Nevertheless, there are exceptions. Unfortunately, the taxpayer failed to persuade the First Tier Tribunal that one of the exceptions applied in Trustees of Bessie Taube Discretionary Settlement v HMRC (2010) UK FTT 473.