Tax treatment of mixed trusts

What is a ‘mixed trust? Before we answer this question we need to take a step back and look at the main characteristics of the two main types of trust you are likely to be faced with in your ATT paper 5 examination – these being discretionary trusts and interest-in-possession (IIP) trusts.

A discretionary trust is one in which the trustees have total discretion over how and when to distribute the income and capital of the trust. A beneficiary of a discretionary trust has no rights to income or capital and may only benefit if the trustees exercise their discretion in their favour.

Discretionary trusts do not have to distribute trust income. Instead they can ‘accumulate’ all or part of the annual income and retain that income within the trust. Any trust which has power to accumulate income is a discretionary trust.

Interest-in-possession (IIP) trusts have no power to...