The Minor Beneficiary Regime : Part Two

In 2001, Parliament determined to tax income that children under sixteen derive from trusts at 33 per cent rather than at the individual rates of the children concerned. This change in policy resulted in the Taxation (Beneficiary Income of Minors, Services-Related Payments, and Remedial Matters) Act 2001. This was to respond to parents channeling income to their children via trusts, with a view to that income being taxed at the lower rates that children generally enjoy under the progressive schedule of income tax rates. There are a number of exceptions to the policy of taxing minor beneficiaries at a flat rate of 33 per cent. The policy of section HH 3A(1)(a) appears to assume that most children under sixteen who derive income from trusts in fact derive income that would otherwise have gone to their parents, but for the parents seeking to minimize tax by diverting their income to their children. The minor beneficiary regime divides trusts into five categories: “family,” “independent,” “family innocent,” “mixed,” and “mixed innocent.” Each has rules that address the particular facts