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bigduckontax
bigduckontax, Accountant
Category: Tax
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If there is agreement between all trustees and all beneficiaries

Customer Question

If there is agreement between all trustee's and all beneficiaries can the discretionay trust be shut down by a deed of variation or deed of appointment I've read. If that's the case what are the tax implications of doing this and I assume the trustees would have the power to choose what assets from the trust went where.
Submitted: 2 years ago.
Category: Tax
Expert:  bigduckontax replied 2 years ago.
The general consensus amongst experts is that if the trust's assets are in capital as opposed to income then there would be no tax implications on closure.

If there is income accumulated then it appears this my be distributed and would appear to be relieved of Inheritance Tax under IHTA8, 1984 s66.

However, shutting down trusts is a exercise which can be fraught with difficulties and I would advise th use of a trusted, local solicitor to arrange and oversee its dissolution.

I do hope I have thrown some light on your question.
Customer: replied 2 years ago.

So picking some figures out of the air


 


1. Initial amount put in X years ago by settelor


£500,000


2. Increased to due to investment


£900,000


 


As I understand what your saying is the "income" part of that £400,000 and would that be charged under inheritance tax. If that is the case could you use the person's inheritance tax relief currently at £325,000 so actually you end up paying 40% on £75,000 so £30,000 of tax and there is no tax to pay on the principle £500,000 ?


 

Expert:  bigduckontax replied 2 years ago.
By income I refer to income generated within the trust. The general advice is that this should be rolled up by the Trustees into capital thus avoiding tax altogether on dissolution.

Once the assets are transferred into Trust the IHT relief for the settler ceases to exist. However, if the trust is a charitable one then it is outside the scope of IHT. Otherwise the 325K limit would restrict the IHT payable on vesting.
Customer: replied 2 years ago.

The trust is a personal, dynastic, irrevokable, discretionary trust so not charitable.


 


I'm not understanding the distinction between income and capital. How are you defining income, I think your describing a dispersement that is made to a beneficiary and that itself creates a tax event and is an income for the beneficiary.


 


What is the catch here as if you can put money into a trust before you die, then assign it to one or more people, they can then dissolve the trust at some later date and pay no inheritance tax or similar tax wouldn't everyone be doing this. Is there some time lapse or some other restriction.


 

Expert:  bigduckontax replied 2 years ago.

No by income I refer to income received into the trusty eg from investments. I merely added that bit about charities to cover that aspect.

 

You are perfectly correct in your tax interpretation of income distributed by a trust.

 

The treatment of assets within a trust is governed by the Trust Deed and should trustees stray outside the terms of the deed then that constitutes a breach of trust for which the penalties can be severe. Properly drawn up deeds preclude the process you are suggesting for were indeed that not so everybody would be jumping on that particular band wagon!

Customer: replied 2 years ago.

Ok so essentially what I think your saying is that yes it's possible to dissolve the trust and disperse the funds and there are no inherent tax's involved because people don't do this generally and it would depend on the wording of the trust deeds if it was at all possible ?

Expert:  bigduckontax replied 2 years ago.
That is my opinion, yes, but the Trustees should take legal advice if only to cover themselves against personal liability.
bigduckontax, Accountant
Category: Tax
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Experience: FCCA FCMA CGMA ACIS
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Expert:  bigduckontax replied 2 years ago.
Thank you for your support.

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