For an interest in possession beneficiary, the trust is a conduit through which the income passes, retaining its character and tax rate. interest is received net of 20% tax and is recognised as net interest in the hands of the life tenant. Similarly, dividends are received net of tax at the dividend ordinary rate (8.75% from 6 April 2022) and retain their character as dividend income for the purpose of determining the tax payable by the beneficiary. This ‘look through’ treatment reflects the fact that the beneficiary is entitled to the income as it arises.

In contrast, a discretionary beneficiary has no right to the income of the trust until the trustees decide to pay it to them. There is no method prescribed to match the payment to the income received by the trustees. Consequently, the beneficiary cannot ‘look through’ the trust to the underlying source of the income. The same is true if the trustees merely have the power to accumulate income rather than paying it to the beneficiary, even if the power is