When can capital from an old A&M trust be distributed?

thenudeone

This post contains several points - please bear with me.

13 years ago when the IHT limits were much lower than they are now, my OH had a solicitor set up an A&M trust for our children. All the requirements for favourable PET-IHT treatment were met (i.e. by age 25 etc). The amount in the trust is not far into five figures.

The trust allowed the trustee to pay income (or accumulated un-distributed income) for the education, benefit or maintenance of the beneficiaries as they saw fit, but it doesn't mention anything about distribution of capital.

We now want the trust to provide funds for the beneficiaries' university years.

When can capital in this type of trust be distributed? Do the trustees have to wait until any or all of the beneficiaries are 18 or 25 (or 25 years from the trust being set up) before distributing capital?

If capital is distributed when it shouldn't have been - what are the implications (taxation wise).

On a separate note, the trust holds some investment bonds. If more than the cumulative 5% allowance is encashed, will this create a tax issue? If so - since my OH is well below the personal IT threshold, will any gain be taxed at her marginal IT rate (i.e. 0%) or at the Income tax of CGT rate for trusts? And does the CGT trust allowance apply?

Thanks for any pointers. Searching on the web throws up millions of results and I don't know where to start.

xylophone

Take professional advice? http://www.hmrc.gov.uk/cto/customerguide/page11-3.htm
http://www.certax.co.uk/data/detail_doc.asp?nrg=%93q%7F%7BX%90zb%5D%87a%9F%87%80~~pg%80x%97pm%81kyl%80%7F%85i%8F%92%86%8F%82 might be worth a look?

John_Pierpoint

This money is in trust for the children ?

Have the parents been doing the day to day administration since the trust was created?

I don't think the tax man will be very interested as this is a nil rate band trust, created over 7 years ago..

Who are the beneficiaries? Are they all over 18 now?

Talk to the insurance company about the implications of transferring the investments into the names of the children.

What the kids then do with their money is up to them.

They might want to buy a property in the university town and then rent a room to their fellow students? [though this would require a bigger input from the bank of mum and dad]. The trust could make such an investment but the tax treatment is a whole lot less favourable.

I presume you have realised that Gordon Brown messed about with A & M trusts in 2006, possibly not an attempt at just another stealth tax but a wish to align the "rich" with his pet project of a child trust fund for the "poor".
Sadly a lot of the parents of children failed to share Brown's vision.

thenudeone

The trustees (the parents plus one relative) have managed the trust since inception. The rapid increase in IHT thresholds has made any further additions to the trust less valuable as a tax planning measure.

I am aware of the Budget 2006 changes but AFAICS neither the ten-yearly charge nor the proportionate charge would apply because the cumulative value of the additions to the trust has never been anywhere near any IHT threshsolds.

Some of the beneficiaries are over 18 (but under 25) and some are under 18.

The settlor currently has a net taxable income (after allowable deductiosn) of near zero.

Are there any tax or legal implications of distributing funds to the beneficiaries before they reach 18? (for example by funding a Junior ISA which they can't access until they are 18)

John_Pierpoint

thenudeone wrote: »

The trustees (the parents plus one relative) have managed the trust since inception. The rapid increase in IHT thresholds has made any further additions to the trust less valuable as a tax planning measure.

I am aware of the Budget 2006 changes but AFAICS neither the ten-yearly charge nor the proportionate charge would apply because the cumulative value of the additions to the trust has never been anywhere near any IHT threshsolds.

Some of the beneficiaries are over 18 (but under 25) and some are under 18.

The settlor currently has a net taxable income (after allowable deductiosn) of near zero.

Are there any tax or legal implications of distributing funds to the beneficiaries before they reach 18? (for example by funding a Junior ISA which they can't access until they are 18)

Trying to return the asset's to the settler, would be fraught with difficulties.
To a certain extent it depends on the exact wording of the trust, however my out of date "Noddy" book of trusts keeps mentioning "Saunders v Vautier" (1841), which established the ability of all the possible beneficiaries being autonomous adults and so then able to agree the break-up of the trust.

In reality, I very much doubt that any beneficiary will try to sue the trustees in years to come, for breach of trust. Why do the trustees want to break the trust?

You could try some other forums to see if someone can give you up to date legal advice:
http://www.swarb.co.uk/phpbb/viewtopic.php?f=26&t=408&p=3991&hilit=A+%26+M+trust#p3991
https://groups.google.com/forum/?hl=en&fromgroups#!forum/uk.legal.moderated

My daughter inherited a bequest in a will, when she was about 21.
Guess what she bought with it ?
Here is the answer spelt backwards: 006 ADNOH

xylophone

Are there any tax or legal implications of distributing funds to the beneficiaries before they reach 18? (for example by funding a Junior ISA which they can't access until they are 18)

The second link in post 2 above may be worth a look but if you are unsure you should certainly check with HMRC because disentangling mistakes in Trust taxation is horribly time consuming and can be expensive. http://search2.hmrc.gov.uk/kb5/hmrc/contactus/view.page?record=wsxrNQaOrGg

thenudeone

John_Pierpoint wrote: »

Trying to return the asset's to the settler, would be fraught with difficulties.
..
Why do the trustees want to break the trust?

There is no intention to break the trust. If funds were removed from the trust it would only ever be for the benefit of the beneficiaries.

It's now appropriate for the trust to replace risky longer term investments with safer savings vehicles, because the funds can be useful to some beneficiaries beneficiaries already, and the rest will follow in the near future.

The savings options available to a trust are pretty miserable whereas in a Halifax Junior ISA (with a parent holding an adult ISA), they could be earning 6% pa until that beneficiary reaches 18.

Thanks for the links.