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wind up discretionary trust

including wills and probate
mutantpoodle
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wind up discretionary trust

#372979

Postby mutantpoodle » January 4th, 2021, 12:09 pm

is it complicated to wind up a discretionary trust?
does it require solicitors?

trust is very simple...cash only
ok there is a tax pool but otherwise only the original amount plus taxed interest and declared capital increase

Parky
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Re: wind up discretionary trust

#373154

Postby Parky » January 4th, 2021, 9:07 pm

mutantpoodle wrote:is it complicated to wind up a discretionary trust?
does it require solicitors?

trust is very simple...cash only
ok there is a tax pool but otherwise only the original amount plus taxed interest and declared capital increase


https://www.menzies.co.uk/helping-you/p ... p-a-trust/ covers the basics. Once all the assets are distributed and taxes paid (income tax, capital gains tax and exit charges) the trust is effectively wound up. You declare that on your tax return for that tax year - job done.
You don't need a solicitor.

Parky
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Re: wind up discretionary trust

#374382

Postby Parky » January 7th, 2021, 3:59 pm

Have just discovered while looking for something else that you also need to update the Trust Register when winding up a trust.

seehttps://www.gov.uk/guidance/manage-y ... on-service

"Closing a trust
You must update the trust register when the trust comes to an end.

You will need to confirm that the details on the trust register are up to date and tell us the date the trust ended.

You may need to submit a tax return for the year in which the trust ended."


This post-dates the article I referenced in my previous post.

eisman
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Re: wind up discretionary trust

#375247

Postby eisman » January 9th, 2021, 5:37 pm

To expand on Parky's comments:

The Trustees will need to submit a Return of Trust income and capital gains (if any) up to the date of winding up;
The Trustees will also need to submit an Inheritance Tax Return, as the distribution of capital may give rise to an inheritance tax 'exit charge', based on the rate payable (if any) at the last ten year anniversary (TYA). This return is due (and any inheritance tax paid) within 6 months of the winding up.

Note that, when calculating inheritance tax charges (and only for that purpose), after 5 years any income that has not been distributed is treated as capital. This does not alter its actual nature as income so, for instance, the Trustees can still make an income distribution from such 'old' income (see below).

Other considerations:

As there remains a tax pool, before winding up the Trust the Trustees should consider whether to first make an income distribution to the beneficiaries. The amount paid will be treated as net of tax deducted at the Trust Rate (currently 45%). If a beneficiary's income tax for the year (including the gross amount of trust income received) is taxable at rates less than the Trust Rate, they will be able to reclaim the excess tax suffered on the Trust income.

As the amount in the tax pool may include tax paid in previous years at less than the current Trust Rate, there may be more cash remaining than can be distributed as income. If so, you should limit the distribution to 55/45ths of the amount of the tax pool.

After the Trust has been wound up, the Trustees will be personally liable in the event that any further tax liabilities are due to HMRC. Before making any capital distributions I therefore suggest they:
(a) ensure no further income (or gains) will arise after 5 April 2021.
(b) (after submitting the 20/21 Trust tax return) confirm to HMRC that no further income or gains will arise, and that the Trustees intend to wind up the trust. Ask HMRC to confirm no further taxes are due (subject to paying any inheritance tax due on the capital distribution).
(c) (before making the capital distribution) obtain an indemnity from each beneficiary that, in the event of any further Trust tax actually becoming due, they will pay to the Trustees their share of this liability. You should note that this indemnity may not be enforceable in practice if the beneficiaries spend the money and are unable to pay.

Hope this helps

Eisman

mutantpoodle
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Re: wind up discretionary trust

#375383

Postby mutantpoodle » January 10th, 2021, 9:21 am

capital gains have been taxed in each applicable year
gains below the 'allowance' remain in trust

these wouldnt now be treated again as capital gains and taxed would they?

exactly same situation with building society interest...taxes paid nett balance retained

ie the trust has paid all taxes each year but not made distributions each year
therefore the capital within the trust is greater than when trust was established

??

eisman
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Re: wind up discretionary trust

#375604

Postby eisman » January 10th, 2021, 8:29 pm

If capital gains fall within the annual trust exemption, or have been taxed in previous years, no further capital gains tax should be due by the Trust (I understand the Trust now holds only cash). Likewise, if all income has been taxed in previous years, any income tax due by the Trust will be confined to current year income not yet taxed.

The only potential tax liability is then the inheritance tax exit charge I referred to in my previous post.

The gains will constitute part of the trust capital and the income will be part of the accumulated Trust income. Depending on the specific terms of the Trust Deed, it is possible to distribute income and capital to beneficiaries in different proportions for tax efficiency. For example, first paying income to non-taxpayers or basic rate taxpayers to utilise the tax pool before distributing capital to them, and pay only capital to higher rate taxpayers.

The above, of course, depends on your knowing the beneficiaries' tax position.

Eisman

mutantpoodle
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Re: wind up discretionary trust

#375697

Postby mutantpoodle » January 11th, 2021, 8:38 am

many thanks everyone
things much clearer now
i will have a 'free' 30 minute chat with local solicitor to ask prices
and subject replies...have a go myself

thanks again


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