Trusts and Inheritance Tax

Winding up a trust

Produced by Tolley
  • 03 Nov 2021 11:52

The following Trusts and Inheritance Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Winding up a trust
  • When does a trust come to an end?
  • Crowe v Appleby
  • Inheritance tax consequences of terminating a trust
  • Capital gains tax consequences of terminating a trust
  • Tax saving options on trust termination
  • IHT on death of a QIIP beneficiary
  • IHT on termination of a relevant property trust
  • Capital gains hold-over on termination
  • Life assurance single premium bonds
  • More...

Winding up a trust

When does a trust come to an end?

A trust may come to an end because it has run its course and comes to a natural end. If a trust has no assets , it ceases to exist. Alternatively, a trust ends because the trustees or beneficiaries decide to wind it up: the trustees distribute the assets by exercising their powers of appointment or advancement given in the trust instrument.

The ‘natural end’ category covers such situations as:

  1. the life tenant dies and the fund is to be distributed to the remaindermen

  2. the last beneficiary attains the age, or other specified contingency, on which beneficiaries become absolutely entitled to both capital and income

  3. in a discretionary trust, all of the potential beneficiaries have died or no longer qualify as beneficiaries

  4. there are no assets left in the trust

  5. the trust has contravened the perpetuities rule

The current law provides that the perpetuity period for any trust which commenced after 5 April 2010 is 125 years. Before the introduction of the fixed 125-year period, settlors could choose a period calculated with reference to named ‘lives in being’ plus 21 years, or a fixed period of 80 years. Details of the period chosen should be in the trust instrument. If it is impossible to determine how long the perpetuity period is, (because, for example, the specified lives in being are untraceable), the current law allows trustees to substitute a fixed perpetuity period of 100 years.

The ‘decision’ category includes the following situations:

  1. the beneficiaries, who are all of full age and capacity agree to terminate the trust under the rule in Saunders v Vautier

    See the Partitioning trust funds guidance note

  2. the trustees of a discretionary trust decide that the trust has fulfilled its purpose (eg to educate the beneficiaries)

  3. the financial costs of maintaining the trust outweigh its usefulness

  4. a discretionary Will trust is distributed following the death of the principal beneficiary (eg the spouse of

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