A deed of variation was used to set up a discretionary trust by myself as executor. I am one of two trustees. I have been unable to open a bank account for the trust and the funds are still in probate account. This together with the new tax rates on discretionary trusts have caused me to decide to end the trust and distribute the funds. It is just over two years since the death, and therefore I understand I could not use a deed of variation to do this. I have two questions. How do I go about closing this trust when I have not been able to pay the funds into it? I have not been able to register the trust with HMRC since I do not have a bank account. No income has been received, so no tax is due. Do I need to notify HMRC? I would be grateful for any guidance. Thank you
Hi Mikey,
Under the TRS (trust registration service) rules, if the trust was constituted and in existence for more than 2 years, then a registration is required. You can report this as a non-taxable trust and obtain a URN. Once received, you can log in, claim the trust, and then ‘close’ it down.
Whether it is a fully constituted trust, is a legal question and I’ll let me legal colleagues advise on this.
Lucy Orrow CTA TEP
Lambert Chapman LLP
Thank you Lucy. The Deed of Variation was completed this year, and so has been in existence for less than one year. Or do you mean within two years of date of death rather than creation of the deed of variation?
From TRSM23020
Trusts created by Deeds of Variation
If the beneficiaries under a will or intestacy create a Deed of Variation which includes a trust, the trust is created by the Deed of Variation and not by the will, so the exclusion from registration will not apply.
Example
Caroline leaves her estate to Martha. Martha decides to enter into a Deed of Variation to give her entitlement to a trust for her sisters and their two children. Although certain tax provisions may apply as if this trust was included in the will in general law a variation takes effect from the date of the deed. The settlor of this trust is Martha and it comes into existence when the deed of variation is made (if assets are already available for the trust, or when assets are transferred to be held on the trusts if the estate has not yet been fully administered). This is not a trust created by will and therefore the 2 year exemption does not apply.
I hope this helps.
Lucy
I think I understand now. I need to register the trust with HMRC. Then close it down with HMRC and distribute the assets with the agreement of the other trustee. No gains have been made, therefore no tax will be due. Thank you Lucy.
Hi Mikey,
How long after the date of death was the DOV created? You can create a DOV anytime, but there are potential tax implications if the DOV hasn’t been completed within a two-year period. I’m sure you’ll have taken advice on the tax side as a DOV will pass any responsibility for Inheritance Tax to the Beneficiary(s) and also could affect any means-tested benefits. Re the Trust - What Lucy says…
Chris Bell
Rugby Wills Ltd
Thank you Chris. The DOV was created within 2 years of death. The trust was created in order to keep my inheritance out of my estate for IHT reasons and to protect the funds should I need care in the future. The bank account situation has been very stressful and I am not sure the possible benefits outweigh the stress of managing the trust, as a lay person.
“and to protect the funds should I need care in the future”
I’m afraid that a deed of variation does not do this, and it is likely to be viewed as deprivation. A DOV is only effective for IHT and CGT, if elections are made.
Patrick Moroney
Patrick Moroney
Thank you Patrick. You have been very helpful. I am obviously out of my depth here.
I would recommend Mikey going to a professional advisor who can look through the documentation and tax position rather than trying to decipher opinions on a forum aimed at trust and estate practitioners. The answers on here may assume you have basic knowledge as a practitioner.
The fact that the funds were not physically in the Trust’s bank account may not necessarily mean the Trust did not have any funds in it as this may depend on the actual terms in the DOV. It would be possible for the funds to be legally those of the Trust even if they were never specifically transferred to a bank account for the Trust, in which case the probate account was holding them on behalf of the Trust. I presume you received professional advice on setting up the Trust with the DOV in terms of the income tax implications of leaving yourself in as a beneficiary?
If the funds were indeed those of the Trust then you need to consider the potential exit charges depending on the values involved and even if no IHT exit charge due then whether the relevant forms regarding the exit need submitting to HMRC. As I said, this forum can be extremely helpful but is aimed at those who are in practice and therefore should not be used as a substitute for professional advice.
Thank you. I am seeking professional advice.