Readers’ forum: Are withdrawals trust income or capital?

A discretionary trust holds offshore life assurance investment bonds. The settlor has always been UK tax resident and is still alive. All the trustees are UK tax resident and have always been. It is therefore a UK resident trust.

If withdrawals are taken within the cumulative 5% limits are these withdrawals trust income or trust capital? With a ten-year anniversary approaching the plan was to ensure that the cumulative 5% drawdowns had been taken and paid to beneficiaries in order to reduce the trust capital.

HMRC’s Trusts Settlements and Estates Manual TSEM3220 seems to indicate it is income for tax purposes but I understood that the concept of life bonds is that the 5% is a return of capital.

If it is income for tax purposes does that mean that the payment of the 5% drawdowns to beneficiaries is an income distribution and not a...