Capital and income in trusts: classification and apportionment
A project to examine the complicated rules governing the treatment of trust receipts and outgoings as capital or income and the extent to which trustees who have to distinguish between income and capital should be able to invest on a "total return" basis, with reference particularly to trusts for interests in succession and to charitable trusts with permanent endowment.
On 22 March 2010 the Government announced its acceptance of the legislative recommendations in the Report. The Government’s consultation on the proposed Trusts (Capital and Income) Bill can be found on the Ministry of Justice website.
Professor Elizabeth Cooke, the Commissioner responsible for the project, said:
“We are pleased that Government has accepted our recommendations for legislative reform in this area. The technical improvements set out in the Trusts (Capital and Income) Bill will have a positive impact across the trusts sector, benefiting charities, families and the trust industry.”
Recommendations
On 7 May 2009 we published our recommendations in a report (LC 315). The report is the outcome of the latest in a number of Law Commission projects on trust law. The project was referred to the Law Commission by the Lord Chancellor as a result of concerns expressed during the passage of the Trustee Act 2000 through Parliament. Our terms of reference asked us to consider:
- the rules governing the classification of trust receipts as income and capital;
- the circumstances in which trustees must apportion receipts and outgoings between income and capital;
- the circumstances in which trustees must convert and re-invest trust property; and
- the rights and duties of charity trustees in relation to investment returns on a charity’s permanent endowment.
The report recommends that receipts following tax-exempt corporate demergers should be classified as capital, subject to a limited discretion to make a payment to income. It also recommends the abolition of the equitable and statutory rules of apportionment for all new trusts. Finally, it recommends a new statutory provision that will make total return investment more easily accessible to charitable trusts with a permanent endowment.
The Law Commission’s recommendations were welcomed by the Trust Law Committee who stated:
"The Trust Law Committee gives its unqualified support for the recommendations in the Law Commission’s report and for the Bill to implement those recommendations. We offer our whole-hearted congratulations to the Law Commission for having addressed an area which has been of major concern to trust practitioners for a very long period and for the manner in which that concern has been addressed."
Written Ministerial Statement
Bridget Prentice, the Parliamentary Under-Secretary for Justice, made the following statement on 22 March 2010:
In May 2009, the Law Commission of England and Wales published its report: Capital and Income in Trusts: Classification and Apportionment (Law Com no 315).
The report makes three legislative recommendations to reform aspects of the law on the classification and apportionment of income and capital in trusts.
The purpose of these reforms is to simplify and modernise trust law rules that create unnecessary expense, litigation and difficulty to trustees of both private and charitable trusts; to decrease the regulatory burden on the Charity Commission; and to facilitate total return investment by charities.
The Government have carefully considered the report and are pleased to announce that they accept the Law Commission’s recommendations. It is now intended to consult on these reforms and the proposed draft legislation.
Other documents
Executive summary
Press release
Impact assessment
Analysis of consultation responses
Background
A consultation paper was published in July 2004 (LCCP 175). We received 42 responses. Work on the project was suspended pending completion of the Commission's projects on Trustee Exemption Clauses (published July 2006) and Cohabitation (published in July 2007). The project recommenced in January 2008.
For more information, contact the property and trust law team or go the team page.
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