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TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15976
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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I need some advice on dissolving/taking money out of a discretionary

Customer Question

I need some advice on dissolving/taking money out of a discretionary trust. The trust was set up by my father who died more than 20 years ago my mother is still alive aged 87 my brother and I are the named beneficiaries.
Submitted: 3 years ago.
Category: Tax
Expert:  TonyTax replied 3 years ago.

Can you give me an idea of what assets the trust has and who benefits from it please. You mention your mother and then say that you and your brother are the beneficiaries. Could it be that the trust is an interest in possession trust of which your mother is the life tenant who benefits from the income of the trust until she dies at which time the assets in the trust pass to you and your brother?
Customer: replied 3 years ago.

It is a discretionary trust. The value was £160 k in March 2014. 150 k in investments 10 k in cash approx. The beneficiaries under the trust are Lucy Venning (My mother) children (Me and my brother) and remoter issue. My mother is a an executor and trustee along with Wilfred T fry Ltd. Powers are given to the trustees to release income and capital to any of the beneficiaries at their discretion although clause 5 g declares that it was my fathers wish that the trustees regard his wife (My mother) as having the greatest claim on the funds. My mother is in agreement that we should get the money out now, she has no use for it.

Expert:  TonyTax replied 3 years ago.

Leave this with me while I draft my answer. There is a fair amount to get through so please bear with me.
Customer: replied 3 years ago.

Will do. My main concern is regarding the tax implications of dissolving the trust now as opposed to letting it run its natural course and dissolving it when my mother eventually passes.

Expert:  TonyTax replied 3 years ago.
That's what I'm looking at. Thanks for your patience. There's no need to respond to this post unless you have additional relevant information. You will be informed when I've posted my answer.
Expert:  TonyTax replied 3 years ago.

Hi again.

Take a look at the web pages here, here, here, here and here (also below).

IHT on trusts can be a simple or complicated affair. The extent of the complications is related to the gifting activity of the settlor (your late father) in the seven years before the trust was set up, additions of capital to the trust, if any, whether any ten year charge have been incurred, whether any capital payments have been made to beneficiaries and the amount of time that has elapsed since the last ten year charge.

Relevant property trusts which are defined here are liable for ten year IHT charges at 30% of the lifetime rate of IHT which is currently 20% (half the death rate). So, for a full ten year period the charge is 6% of the excess of the value of the trust assets over and above the nil-rate band which is currently £325,000. When the trust comes to an end a 6% exit charge can arise but the rate may be less where less than 10 years has passed since the last ten year charge. Charges can also arise on payments of capital to beneficiaries during the lifetime of the trust.

Given that the trust is only worth £150,000 now and it is 20 years since your father died, there are unlikely to have been any recent ten year charges as the nil-rate IHT band was £150,000 in 1992 and has increased since to the current level of £325,000.

The notes here which include a very helpful calculator describe the rules in a fairly straightforward fashion and give examples of the potential IHT charges a discretionary trust may face on interim capital distributions and on final capital distributions.

If the final payments include accumulated income, the income payments will be taxable on the beneficiaries as income depending on their personal tax situations. Any tax paid on that income and rolled up in the "tax pool" will be imputed to each beneficiary in the appropriate proportions to offest against their personal tax laibility on their share of the trust income.

As I said earlier, the calculations can be simple or complicated and you would be well advised to have an accountant or tax adviser look at the figures in detail, though I suspect there will be no IHT exit charge unless there have been substantial previous interim capital distributions.

I hope this helps but let me know if you have any further questions.