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TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15977
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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I have a family trust set up by my grnafather. My mother received

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I have a family trust set up by my grnafather. My mother received a little income from this trust for 40 years. She died in 2013 and I declared the trust on my IHT400. I paid inheritance tax calculated by HMRC. I now need to complete a tax return for 2013/14, the year of her death, and 2014/15 the year of executorship. What tax should I be paying if I now liquidate the assets. Do I have to pay for a "Chargeable Event", or have I already done this by paying my IHT?


Can you tell me if the trust was set up as part of your grandfather's will or during his lifetime? When was it set up? Did your mother have a right to the income of the trust until she died? What does the trust document say should happen to the trust assets following the death of the life tenant (your mother)?

Customer: replied 3 years ago.

Thank you Tony

The Trust was indeed set up as a will Trust by my grandfather in 1978 on his death. My mother had right to both income and assets, but took only income until she died. In her will my mother decreed that the assets from the trust should be divided between her five children.


Leave this with me while I draft my answer.
Customer: replied 3 years ago.

Thank you

Hi again.

You might refer to the notes here as part of this answer. A chargeable event is specific to life related insurance or investment bonds. Discretionary trusts pay income tax at 45%. Interest in possession trusts pay income tax at 20% on non-dividend income unless it is directly mandated to the beneficiary or the income is what is normally treated as capital in which case the 45% rate might apply.

It appears that the trust was either an interest in possession trust as your mother had a right to the income and, more unusually, the capital or it was a bare trust in which she was absolutely entitled to the trust income and assets. In addition, the value of the trust assets formed part of her estate for Inheritance Tax purposes, thereby uplifting their cost for CGT purposes to the value at death.

It would have been pointless setting up a bare trust unless your mother was under 18 at the time it was set up in which case she would not have been able to demand access to the income and assets until she was 18.

If the trust was a bare trust, there are no IHT ten yearly or exit charges. The same applies to interest in possession trusts set up before 22 March 2006.

If the trust was a bare trust, the assets became the property of the deceased estate when your mother died. You can distribute those tax free as the estate has been through the IHT process whether IHT was payable or not.

The estate income and capital gains between the date of death and 5 April 2014 needs to be disclosed in a trust and estate tax return, SA900, which you can find here. Income Tax is payable at 20% on estate income. CGT is charged at 28% on gains in excess of the annual CGT exemption of £10,900. Look here and here for more information.

If the trust was an interest in possession trust, the taxes on which you can read about here, here and here you can also distribute the assets tax free or liquidate them, pay any CGT due and pay out the cash. A trust return may need to be completed to disclose income and gains that arose between the date of death and 5 April 2014 and between 6 April 2014 and the date the trust is wound up if that is by 5 April 2015.

If you go into another tax year not having wound up the trust, you will have another tax return to complete. CGT may be payable if assets are sold within the trust before the cash is distributed but only on the increase in value between the value on the death of your mother and the sale proceeds.

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

TonyTax and other Tax Specialists are ready to help you
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Customer: replied 3 years ago.

Thank you very much for this Tony.

I was unsure whether she was entitled to the capital and on rereading the original Will Trust I see it was only income. From what you say, therefore, it appears to be an interest in Possession Trust. In which case, if I read this right, all I seem to need to do is complete executor tax return, plus a tax return for the 2013/14 and pay nay tax owing. You are right about the Insurance Policy, this is exactly what it was. Plus some shares. I know for SA900 I will therefore need to show the value at death, the value at sale and the value of dividends received. There was not income on the insurance policy after death. If you think I have understood you correctly from what I ay here, can you let me know. Many, many thanks, ***** ***** extrememly helpful.

Customer: replied 3 years ago.

Oh an another quick question. I am not sure I understand the following statement.

"Interest in possession trusts pay income tax at 20% on non-dividend income unless it is directly mandated to the beneficiary or the income is what is normally treated as capital in which case the 45% rate might apply".

On receipt of probate the insurance policy was redeemed. This was a chargeable event. The IHT was paid on the whole value of the Policy. Is this the non-dividend income you refer to? Also how could income be treated as capital? Thanks

By the way, my name is ***** ***** I am happy to pay the fee now, this is just to help me understand.

Many thanks

I'll deal with your questions and get back to you in a bit. I wasn't aware there was an insurance bond? Whose life was the bond drawn on? Who was the beneficial owner of the bond, the trust or your mother?

Customer: replied 3 years ago.

The Bond was in my mother's name and the company (Friends Life) referred to the redmeption as a Claim. The money was paid out and the chargeable event certificate was provided separately.




Take a look at page 11 of HS320 here.

Assuming the policy was drawn on your mother's life and she was the beneficial owner, then the policy would have paid out on her death and the chargeable event gain would have been taxable on your mother in the tax year of her death (6 April to date of death). Assuming the policy was a UK policy, the gain will be treated as having suffered tax at the basic rate, top-slicing relief may apply and if your mother wasn't a 40% taxpayer in the tax year of her death when the top-slice of the gain is added to her income there will be no further tax to pay on the gain. The gain should be reported on the SA101 pages, (page Ai1).

If the gain had been owned by the interest in possession trust, there would have been additional tax to pay on the gain over and above the 20% tax treated as having been deducted at source. A gain such as this is one on which a trust would pay a higher tax rate. See page 16 of the trust return notes here. Take a look at the chargeable event gain rules here.