Discretionary Trusts - tax implications for beneficiaries.

Chipmunk1958

My father set up 4 Discretionary Trusts for his (now adult) grandchildren 25 years ago. His total estate will fall below the IHT allowance.

On his death, the grandchildren will receive approximately £14k each.

Will they be personally liable to pay tax on this inheritance?

Many thanks in anticipation.

Keep_pedalling

Did he put the money in trust 25 years ago, or are the trusts created by his will? If the former are you sure they are discresionary trusts? It seems odd that he would create 1 for each GC rather than a single DC.

Chipmunk1958

He invested a set amount for each grandchild, when they were very young, on the advice of his accountant at the time. Documentation from  HMRC identifies them as Disc (?Discretionary) Trusts. However, on checking the Providers correspondence, they are labelled as Capital Investment Bonds.

Keep_pedalling

Taxation of CIBs held in trust is something I know nothing about but there is some info here.

https://techzone.abrdn.com/public/iht-est-plan/Taxation-of-Bonds-in-Trust

poseidon1

Chipmunk1958 said:

He invested a set amount for each grandchild, when they were very young, on the advice of his accountant at the time. Documentation from  HMRC identifies them as Disc (?Discretionary) Trusts. However, on checking the Providers correspondence, they are labelled as Capital Investment Bonds.

What exactly is this HMRC documentation? Setting up 4 tiny individual discretionary trusts 25 years ago would have been pointless and overly complicated in the cirumstance you outline. A single discretionary trust covering all 4 GCs , but holding the 4 bonds , would have been the sensible less complicated approach. 

Can you provide an extract from one of the so called discretionary trust deeds , which would be a separate document distinct from the insurance bond provider's documentation?

As regards IHT, whether or not these were actual gifts into discretionary trusts, the 7 year survival period for your father has long since elapsed, so should be  IHT free on his eventual death.

However I am confused as to how you are able to quantify what the GC will actually receive on his death ( I assume your father is still alive).

Investment bonds are single premium investment contracts usually invested in a mix of stock market assets and therefore subject to constantly changing values. So is the £14, 000 you quote the current valuations for each bond, or the original amounts invested 25  years ago?

As for the grandchildren they may or may not have income tax liabilities on eventual personal encashment of the bonds depending on their own marginal tax rates, the extent of bond gains over the last 25 years and whether the bonds were offshore or UK situs contracts at inception.

However the income tax outcomes are different and more onerous if the bonds are encashed by the trustees whilst still in trust, rather than transferred into the GC 's personal ownership. Incidentally who are the trustees? 

You need to provide a lot more clarity on exactly what happened 25 years ago , and the current position now.

Chipmunk1958

Thanks for your extensive reply. We realise there are more questions which we cannot answer and have decided to refer back to the accountant who set up the Trusts originally. Your response is appreciated.