Share this content

Distribution of capital by a discretionary trust

What is the tax position in relation to capital distributed to beneficiaries by a trust?

Didn't find your answer?

A discretionary trust was established some 20+ years ago under a deed of variation and the trustees want to distribute part of the capital to some of the beneficiaries.

What is the tax effect of such a transaction?

Replies (10)

Please login or register to join the discussion.

avatar
By Tax Dragon
05th Jul 2022 11:00

A charge under Ch III of Part III of IHTA 1984 - look back to the last occasion of such charge some + years ago.

Thanks (1)
avatar
By AB_85
05th Jul 2022 11:09

This is a complex area and you really need paid advice. You will also need to provide the advisor with a lot more information.

In summary, there will be IHT to consider. Depending on the size of the settlement, there may be an IHT return to make (these returns are complex), and an IHT charge at a rate somewhere between 0% and 6%.

Depending on the nature of the capital distributed, there may be a capital gains tax liability crystallised. It may (or may not) be possible to defer this liability.

This assumes that the trustees are UK resident for tax purposes and that the settlor was UK domiciled. If not the position would be very different.

Distributions may or may not be good tax planning. Non tax considerations may outweigh the tax issues.

I really think you need to speak to an advisor to fill in the gaps.

Thanks (2)
avatar
By Tax Dragon
05th Jul 2022 12:53

As an aside, it seems likely that + is at least one and the accumulation period has ended (and there is an obligation to distribute the unaccumulated income). AB_85 may know better than me, but I don't think there is any kind of deeming provision to match capital distributions to undistributed income... it follows that, if there is unpaid income and the trustees choose to distribute capital, they will still have to distribute the income as well.

(I am assuming everything is/was UK.)

Thanks (0)
Replying to Tax Dragon:
avatar
By AB_85
05th Jul 2022 13:36

I agree is potentially an issue. Would depend on the trust deed. I believe many deeds still allow some discretion as regards timing of income distributions, who to distribute to etc even after the accumulation period has ceased. I don't think it's analogous to an IIP.

Of course distributing income instead of capital (is there income? how much? is it deemed capital?) may be more tax efficient. Or it may not be depending on tax pool balance, marginal rate of beneficiaries etc. Who knows?

Thanks (0)
Replying to Tax Dragon:
avatar
By More unearned luck
05th Jul 2022 13:44

A decision of the trustees to retain income makes it capital and, I think, that HMRC (or perhaps the law) infers that such a decision has been made if income is simply not distributed within a certain time (3 or 5 years?) after receipt.

Thanks (0)
Replying to More unearned luck:
avatar
By Tax Dragon
05th Jul 2022 14:17

Well-advised trustees would consider the matter before the end of the accumulation period, to remove doubt. Accumulate what they want accumulated, etc. Any inference as you think exists during the accum period clearly ends when it ends - and the 3 (or 5) years' worth of income that hasn't been accumulated by inference at that point is presumably distributable [if not automatically accumulated - and I'm not aware of a rule that does that either... other than s31, which is situation-specific].

(I'm not actually sure there is any such inference, at least not in trust law, else s64(1A)(b) IHTA seems somewhat otiose; but I'm not sure there's not, either. IANAL.)

Thanks (0)
Replying to More unearned luck:
avatar
By AB_85
05th Jul 2022 14:16

Agree (that was my reference to "is it deemed capital?" above.)

As regards time limits, I am never entirely sure on that point. Certainly there is a time limit of 4 years in IHTA84, but I don't believe that can be read across to say the income tax treatment on distribution. I agree with the principle though. Certainly any income that gets rolled up during a prescribed accumulation period must be capital.

Thanks (0)
avatar
By Joe Soap
05th Jul 2022 14:12

I appreciate that lots more details and info is needed for a fully informed reply - on which action could be taken.
The income (and there is income) is fully distributed each year - it all falls within the personal allowances of the minor beneficiares - and the tax pool carried forward is very small.

Thanks fot the thoughts though.

Thanks (0)
Replying to Joe Soap:
avatar
By Tax Dragon
05th Jul 2022 14:34

A further thought (I know I've gone way off topic! But having mentioned s31 already...) the trust may no longer be fully discretionary, even as regards who gets what. If this was set up for minors, some of whom are now majors, then s31 may be in point - and s31(1)(i)(b) then gives the majors an interest in possession (unless this was pre-empted).

I'll stop now :-)

Thanks (0)
Replying to Tax Dragon:
avatar
By Tax Dragon
05th Jul 2022 16:19

Tax Dragon wrote:

I'll stop now :-)

Except to add a reference to IHTM42808, which might be in point on the facts given - and the gaps therein. Or it might not. So might IHTM42816, for that matter (though only by previous action of the trustees).

In short, I agree my opening reply was too basic - even if it's right - and AB_85's first reply was a far better response.

Now I really am out.

Thanks (0)
Share this content