In a consultation paper published on its website, HMRC states that changes introduced under Finance Act 2011 scrapped a strict restriction on distributing realised profits to allow flexibility for trusts that had accumulated income deficits in excess of their income for a given period.
This restriction meant that where a trust has brought forward accumulated deficits which are larger than income for a given accounting period, they were prevented from distributing capital to investors.
However, due to a another rule that requires trusts to distribute 85 per cent of all income for any accounting period, the effect of this rule change was to “force” trusts in these circumstances to distribute profits.
HMRC said this was an “unintended consequence” of the rule change, which was designed merely to offer the option of such distributions.
Investment trusts, which are regulated in the same way as other listed companies, are forced to distribute income due to an exception they enjoy from corporation tax on any chargeable gains.
As investors are individually taxed on gains arising from trading of their holdings in trusts, this exemption prevents a “double layer of taxation”.
The paper states: “Whilst the intention of the changes was to permit distributions from capital profits, it was not intended to force a distribution from capital profits.”
The consultation period will last for a period of four weeks.
Additional reporting by Ashley Wassall