I hope that all of the children are still alive, otherwise there will be another issue for any deceased child’s personal representatives - for not declaring the interest in possession.
How have the trustees dealt with the trust for tax purposes?
I suspect they may have filed income tax returns on the basis the trust was an accumulation trust – paying income tax at the trustee rate. Even in these circumstances, I understand HMRC will only entertain a claim for repayment of tax wrongly assessed for the last 4 tax years.
If the trustees have treated the trust as an accumulation trust, I anticipate they will also have treated it as falling within the relevant property regime. In correcting the IHT situation, I understand HMRC will only entertain a claim for repayment if the tax was paid within 4 years before the date of the claim.
Whilst, as Andrew Mortimer says, the children should now disclose to HMRC the income to which they were entitled over the years since they each attained age 21, I suggest the trustees and beneficiaries might put a joint case to HMRC to see if it will treat the historic overpayments of tax, and under disclosure, as cancelling each other out so that no adjustment (or perhaps minimal adjustment) will be required, with the trust being taxed correctly going forward. HMRC may want to have details of the income over the period and a note of how this might affect the individual beneficiary’s personal liability, so that it can justify its decision (if required).
Any agreement with HMRC will not, though, remove the trustees’ liability to the children to account to them for the trust income that should have been paid over to them as of right. I suspect any discussion around that might well depend on whether the trustees are family members or professional trustees.