discretionary trust tax pool to capital

[mutantpoodle]

I understand that after some years the interest earned in a discretionary trust is considered to be 'capital'

does that mean that the tax paid on that interest...which is now shown within the 'tax pool' is no longer reclaimable?
and does that mean that a payent to a beneficiary would be 'out of capital and no tax payable by recipient?

and how many years before this applies?



lastly !!!.......why does it appear to be so difficult to wind up/close sucha trust
all assets in cash and available at instant access

[Gan020]

I understand that after some years the interest earned in a discretionary trust is considered to be 'capital'

does that mean that the tax paid on that interest...which is now shown within the 'tax pool' is no longer reclaimable?
and does that mean that a payent to a beneficiary would be 'out of capital and no tax payable by recipient?

and how many years before this applies?



lastly !!!.......why does it appear to be so difficult to wind up/close sucha trust
all assets in cash and available at instant access

I too would like to know out of intellectual interest how long before HMRC judge the interest to be capital. I've previously tried to find information on this and failed. What I can say is that for the discretionary trust I am trustee for, the trustees at one time did not distribute all the tax pool for around 7 years and it did not draw the attention of HMRC. However, the tax pool was distributed before the 10 year anniversary as this was the most tax efficient thing to do.

I am sure you are aware of this but with the tax pool available to distribute with tax paid at 45%, distributions of out income to beneficiaries will get a tax refund unless they are have an "income" more than £150k and even then they will pay zero.

If you instead distibute as capital (which you might have to do some of becauase there is insufficient tax pool to empty the trust), there will be an exit charge on the capital distribution which you can choose whether the trust or the beneficiary pays. From what I remember the trust usually pays it although the trust pays a higher grossed up amount, so that that the amount post tax is equalised to the treasury/beneficiary.

You are right that the beneficiary does not have to pay tax on the capital distribution, but the trust does based on a calculation of the value of the assets of the trust at the last anniversary date. If the assets (after BPR allowances) were less than £325k at that time the exit charge will be zero, else there is a calculation to do, which we can explore if that's required.

Also, as the trust is now in instant access cash but presumably wasn't before the trust is also liable to CGT.

[Dod101]

I understand that after some years the interest earned in a discretionary trust is considered to be 'capital'

does that mean that the tax paid on that interest...which is now shown within the 'tax pool' is no longer reclaimable?
and does that mean that a payent to a beneficiary would be 'out of capital and no tax payable by recipient?

and how many years before this applies?



lastly !!!.......why does it appear to be so difficult to wind up/close sucha trust
all assets in cash and available at instant access

It is a long while since I had anything to do with a discretionary trust but surely if the trustees resolve to wind up the trust (and if there is nothing in the trust deed to stop them) then that is it. They simply resolve to do that and use their discretion as to how the assets should be distributed amongst the beneficiaries. Having done that, it may take some time to carry out, because of tax questions and any other loose ends that may have to be tied up, but in principle it is surely not that difficult.

Dod

[helfordpirate]

There was always a grey area regarding the treatment of accumulated income and capital in relevant property (discretionary) trusts and it was left to the courts to sort it out. However, in 2014 the law was changed to "clarify" the situation - see for example https://library.croneri.co.uk/cch_uk/btr/363-490 - essentially for IHT purposes accumulated income becomes capital after five years. (This is a gross simplification!)

Almost all Deeds of Trust will give the trustees powers to accumulate income as capital (usually by resolution rather than a full deed) and normally also allow the trustees to hold income as accumulated income on account and to distribute such income as if it were received in that year. The trustees should be maintaining proper accounts that show separate income and capital accounts and should have documented resolutions showing when they have distributed or capitalised income. If that is the case, then generally HMRC accept what is documented in the trust accounts and distributed income will be taxed as income on the recipient (with a tax credit) and distributed capital will be potentially chargeable to IHT. Though holding accumulated income for a long time or actually re-investing it but showing it as income is likely "on the edge".

If the trustees have not clearly and regularly dealt with the accumulated income, then the five year rule comes into play. At a 10 year anniversary, all accumulated income older than 5 years is treated as capital and so relevant property and so subject to the IHT charge. Note no concession is given for the fact that the income was not capital for the full 10 years - which it would be if the trustees were explicitly capitalising it.

In my mind there is still a grey area however, as the law technically only applies to IHT i.e. five year-old accumulated income is capital for a periodic charge. It does not explicitly state that income on account can no longer be distributed as income to a beneficiary. My conclusion, when I faced this as a trustee, was that provided you had clear accounts and written resolutions showing the trustees intention to accumulate rather than capitalise they were unlikely to challenge you and certainly not for periods of less than 5 years.

Re winding up a trust, a trust ends when all the capital and income is distributed. Usually, income can be distributed by resolution of the trustees, but often a capital appointment will require a Deed. It is not difficult to write a deed yourself - it just needs to say its a Deed and needs to be witnessed. The only complication is if there is IHT to pay and submitting final tax returns to HMRC. You also need to prepare final accounts for the beneficiaries.

[mutantpoodle]

qq
Re winding up a trust, a trust ends when all the capital and income is distributed. Usually, income can be distributed by resolution of the trustees, but often a capital appointment will require a Deed. It is not difficult to write a deed yourself - it just needs to say its a Deed and needs to be witnessed. The only complication is if there is IHT to pay and submitting final tax returns to HMRC. You also need to prepare final accounts for the beneficiaries.
uq

many thanks
both trusts are well under IHT limit/levels
both trusts are 28 years old....so as far as I am aware are not subject to charges on withdrawals etc
both trusts do annual tax returns and document every transaction

chats with local accountants who advised that they did not know about winding up trusts, but kindly offered to investigate and learn...AT OUR EXPENSE
suggested loads of paperwork required and letters back and forth
as usual for such professions

so based on your idea...all we need do is distribute the interest to maximise tax pool
then distribute the capital

who do we then advise?

[Parky]

qq

who do we then advise?

I think you just need to update the trust register, and then indicate on your next tax return that the trust has been wound up.

[helfordpirate]

FWIW here is my checklist for when I wound up a discretionary trust (just qualified as IHT excepted) a few years ago...

- prepare minutes of trustees meeting to document decision to wind up trust
- prepare Deed of Appointment to distribute capital
- finalise trust accounts
- prepare holdover claims for in-specie fund transfers (not relevant to you)
- prepare R185(Trust) forms for income distributions
- prepare closing accounts reconciling trust assets with distributions and closing expenses
- prepare letters of discharge/receipt for beneficiaries
- complete partial year tax return
- write to HMRC Trusts to ask them to indicate they have no further interest in the Trust (my trust was pre-registration)

I'd say this was pretty belt and braces - but you do need to check the Trust Document to see what is required to make a capital appointment i.e. a Deed or simply a written resolution. The beneficiaries were my adult children so this was probably OTT - but if they were less close I would dot the i's and cross the t's as much as I could.

In my case there was a lot of finessing as the trust fund was invested in funds and values change daily, dividends appear etc. You don't know how much you can distribute till you know how much tax to pay, you don't know how much tax till you have all the income ... and so on. Your case may be simpler.

Good luck!

[eisman]

Helfordpirate wrote

If the trustees have not clearly and regularly dealt with the accumulated income, then the five year rule comes into play. At a 10 year anniversary, all accumulated income older than 5 years is treated as capital and so relevant property and so subject to the IHT charge...

In my mind there is still a grey area however, as the law technically only applies to IHT i.e. five year-old accumulated income is capital for a periodic charge. It does not explicitly state that income on account can no longer be distributed as income to a beneficiary.

To aid clarity (I hope), I would refer you to my response on a similar query:
https://www.lemonfool.co.uk/viewtopic.php?f=49&t=32052&p=458005#p458005

eisman