Discretionary Trust Closure

by **rowberme** on Sun Feb 15, 2009 10:45 pm

About 12 months ago after the death of my father in law a Deed of Variation and Subsequent creation of a Discretionary Trust was created on the death of my Mother in law who passed away some 10 months before her husband, to reduce liability to IHT. The Trust was set up with HBOS, it was registerd with HMRC as non incoming earning. Initial investment to the trust was £266000. I and my Wife are both Executors, Trustees and Beneficaries.

Whether we were correct in doing this is debateable but we had need for a Capital purchase and had alot of very difficult times with HBOS resulting in us removing the funds from the Trust to ourselves as Beneficiaries. Lump sums of £160000, £70000 and finally £36265 totalling £266265. £265 more than was placed in the Trust. The withdrawals and surrender have generated two chargeable event certificates for £921 and £887. Before advising HMRC I would appreciate an answer to the following questions:

As Trustees what other Taxes are HMRC likely to place on us as Trustees and at what rate.

As Beneficaries My Wife and I have to consider our personal tax. As I understand the rules Trusts can have many types of assets but in our case it was Capital ONLY and no income. Personal tax forms only talk about income from investments, does this mean we do not have to declare the Capital received. I find the terminology very confusing whether income means Capital and any income generated from that Capital or just the income generated.

Thankyou in anticipation

by **Arnold Aaron** on Sun Feb 15, 2009 11:41 pm

Before the funds were withdrawn from the investment bond, did you sign a deed of assignment? This would have been drawn up by the life company the investment bond is held with and you would have had to sign it.

A deed of assignment is a document used to transfer ownership of the funds from the 'Trustees' to the beneficiaries. In doing this, there are no tax consequences. Once this is signed the investment bond is then owned personally by whomever it was signed over to, most usually the beneficiaries of the Trust, and they can then proceed to cash in the investment bond in a personal capacity, NOT as Trustees.

Any chargeable gains would then go on the personal tax status of the beneficiary in question.

If you did NOT sign a deed of assignment, it is most likely that the funds were surrendered in your capacity as Trustees. If this is the case, if the bond is a UK (onshore) bond, then the tax liability is 20% on the 'chargeable gain'. If it was set up an an offshore bond it will be at 40% of the 'chargeable gain'.

If this outcome in your circumstances is not as you would have hoped, you should be asking the financial advisor who set this up for you why they did not give you advice on this matter.