Jan CM
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Treatment of trust 'loan' to beneficiary

Treatment of trust 'loan' to beneficiary

I have recently been appointed accountant and tax advisor for a trust, which has been established by will.  The will stated that all assets of the deceased should be put into trust for their spouse and children (4 beneficiaries), which is relatively straight forward. The beneficiaries are also trustees.  Some of the assets, however were in bank accounts or ISAs as declared on the probate forms, which has been transferred into the spouses name.  The other beneficiaries (and hence trustees) have informally agreed that they are happy that the spouse invests/utilises these assets as they see fit. The will also states that the spouse should receive all income from the trust in their lifetime.

There are therefore a number of questions here, does this form a loan from the trust and if so should it be part of the trust agreement (assuming the spouse retains the income)? Or should it be treated as an income distribution?

I'm not sure there is a significant difference in terms of net tax position, whether the income is received by the trust or by the spouse and given that the will stated all income should be received by the spouse in their lifetime is there a legal issue?  The income would be taxed in the trust at the prevailing rate (45% over £1k), the spouse would then be able to claim the tax back (using form R40 or via self assessment), and then pay the relevant tax rate on their income.  Obviously if the income is taxed in the trust, this would be more detrimental to the trust and the remaining beneficiaries, and the individual spouse would benefit from claiming back the tax.  Are there any rules or laws governing this area?  I can't seem to find much in terms of tax, and legally everything seems to point purely to the trustees position to act in the best interest of the beneficiaries.

Are there any tax consequences that I'm missing, and in terms of the legality of the treatment of these assets, should I refer them back to the solicitor who drew up the agreement?

Any guidance will be gratefully received.

Many thanks


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24th Feb 2016 11:31

Clarificatioin please

If the Bank has transferred accounts into the Spouses name, that would indicate to me that these were joint accounts, passing by survivorship, and not belonging to the Trust at all. The 50% value will have been in the Estate calculations/Probate but that doesn't automatically make it a Trust asset.

Or are you saying the Trustees/Executors instructed the Bank to take this action?

If the latter then they would appear to have made Capital Distributions - does the will/trust deed allow for this?

A loan is only a loan where the correct steps are taken and a loan formally agreed.  

Thanks (1)
24th Feb 2016 13:50

But who owns the beneficial interest in the assets transferred?

There is an argument that the assets remain trust assets, albeit that they are registered in the surviving spouse's name.

Alternatively, does the will trust provide for a power of advancement, in which case the transfer is a transfer from the trust to the beneficiary?


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By maxaca
24th Feb 2016 14:34

tax treatment of income

if the Will states that the surviving spouse gets the income then this is taxed at normal rates not the discretionary trust rate

Thanks (1)
By Jan CM
26th Feb 2016 11:56

Thank you for your comments and advice.

Most of the assets were in joint names so were transferred to the spouses' name by survivorship.  I think there may have been an ISA that was in a sole name.

Having now obtained and reviewed the will and trust documentation, it states the following:

"The trustees shall pay income of the trust to my spouse during their lifetime." 

"The trustees may pay or apply any Trust property for the advancement or benefit of any beneficiary."

I am assuming therefore that the transfer of the assets to the spouse is an advancement as permitted by the will trust and therefore the assets are treated as those of the spouse rather than the trust. Income would be taxed as received by the spouse.

Does there need  be any documentation regarding the advancement - the will does not provide this information?  Perhaps a deed of advancement?  Or is this for when the trust is brought to an end, which is not the case.

Many thanks for your guidance.




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By maxaca
26th Feb 2016 14:41

any assets that were jointly owned and passed by survivorship

were never part of the trust and transfer to the surviving spouse is just what happens - the income is not and never was trust income...

sounds like there was very little in the trust but any other assets owned by the deceased would be trust assets and if any of these have subsequently been transferred to the surviving spouse (in their own right and not in the capacity of trustee) then this should be reflected by a trustee resolution at the very least or possibly a Deed (that is a legal question, not an accountancy question)

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26th Feb 2016 22:12

Identify sole assets in probate

maxaca is right.

Any assets passing by survivorship could not be part of trust as they were not capable of being owned by either of the joint owners. The value transferred is not therefore an advancement, it belongs to the joint owner by right.

Any other asset such as an ISA which  had to be in sole name would have been in the trust and if capital has been transferred that would have been an advancement and now belongs solely to the spouse, not the Trustees.


Thanks (1)
29th Feb 2016 08:22


Just a minor point but you say that income of the Trust is payable to spouse - does the Trust deed allow the Trustees to pay your fees? They will need to have retained enough capital to do so as it cannot come out of income unless so specified

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By Jan CM
29th Feb 2016 12:40

Thank you Marion and Maxaca,

Thank you Marion and Maxaca, your comments have been most useful.

It might be worth checking that everything has been set up ok in the first instance....  My client set up the trust upon instruction from the deceased's will.  They sought legal advise in doing so from a reputable legal firm who deal with trusts (not myself, as I'm am accountant).  Although not completely happy with the service of the legal team and therefore not keen to use them again, hence why I am attempting to cover these legal queries. 

On setting up the trust various assets were deemed to be transferred into the trust based upon the will of deceased.  This included monetary assets, such as bank accounts and ISAs, but also 2 properties that were jointly owned (I believe as tenants in common) by the deceased and their spouse - one was the PPR and the other a rental property.  Upon setting up the trust, the solicitors have registered the properties between the spouse and trust.  As these properties were owned as 'tenants in common' these can be transferred into the trust with no issues?

The trust doesn't specifically cover anything to do with expenses or costs - the details regarding the distribution of income to the spouse is included in the will, therefore I assume they'll need other tangible assets in order to pay fees and other such costs?

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