Discretionary change ro bare Trust?

In 2000 AD Discretionary Trust created for grandchildren’s benefit, Then in 2011 Settlor advised HMRC (letter and phone) that it was to be changed to a Bare TRUST. In their reply they stated that no further tax returns would be required and acknowledged that it was to be regarded as a BARE TRUST.(they advised that the letter from them was kept by Trustees. Recently they were again phoned and assured the Trustees that no change in situation. However the Trustees have been advised local Solicitor)that a DEED of APPOINTMENT was needed and the beneficiaries all listed with amounts. The TRUST is vested in a share of a property by way of equity release. Also it was stated that we should have submitted a cancellation deed for the original TRUST ??(by a local solicitor) ,any advice please

A discretionary trust doesn’t become a bare trust just because you tell HMRC that it has become one. Similarly you can’t rely on HMRC having accepted the settlor’s word for it.

Just as you have been told, you have to do two things.

  • consider whether you need to file historical tax returns for the last ten years including (possibly) a 10 year anniversary inheritance tax return. If the trust has no income or gains and the value is under £260k you may be okay here.
  • a deed of appointment to appoint the trust fund onto bare trust for the grandchildren. This may also trigger a claim for holdover relief and/or an inheritance tax exit charge, depending on the value.

I don’t know what is meant by a cancellation deed.

Andrew Goodman
Osborne Clarke LLP

Dear Mr Goodman

Many thanks for your kind and prompt advice, (very useful) , as to cancellation Deed , I feel this may have been advised at sometime to Cancel the Discretionary TRUST (?) I may have misunderstood.

(on the original settlement deed it does have word IRREVOCABLE) ???

As to Inheritance tax , the actual amount invested in 2000 AD was £44000. , but with increase in property values is considerably more.

However I assumed that as it was over TWENTY years ago the the gift was made inheritance was not applicable. ?

Am I wrong in this assumption.?


James Sadd

a discretionary trust is and has always been relevant property (unless it was an A&M trust created before 2006 - which may be the case here (?), but even so, the terms do not appear to have been changed until 2011 and then only informally) Relevant property trusts have to account for IHT every 10 years and when any capital leaves the trust (exit charge) subject to the trust property being valued at more than £325k (or the settlor having made other chargeable gifts). I also think the term “cancellation” deed is referring to a Deed of Termination and Appointment. Presumably the settlor was advised about this in 2000 when the trust was created but in the interim has perhaps forgotten.

(To ‘Max’ (Maxine Higgins) Many thanks for your kind advice. Frankly, the Settlor (me) was not understanding the complexities of the TRUST, other than intending benefits for the GC , When I attempted to change to a BARE trust , I remember that the Solicitor said I may Deed of Appointment , but did not feel it worthwhile as at that time the TRUST was fairly modest. (and in his words tedious to fill in at least 9 P295forms ).
Hence I wrote to HMRC and in fact they were very helpful. and commented *I note from your Letter the above TRUST is a BARE TRUST. * You no longer have to fill in tax returns , and sent me a form (T and E whereby they show that there is NO asset value or income.( i.e The Trust has NO VAUE until it crystallises being vested in an equity share of a small house. However as it has increased in future value substantially in the last 10 years I decided to clarify the matter completely , as it may be necessary soon for my co-trustee to deal with this.
Thank you again for your kind interest

There appears to be no power of revocation reserved to the settlor or others but there appears to be an explicit statement that the trusts is to be irrevocable.

However, the trust would terminate once all the trust property is distributed to the beneficiaries.

The term “cancellation” may be used as an alternative to “termination” but no so-called cancellation deed is necessary although the trustees could presumably record the trust’s termination in the form of a trustee resolution or a formal deed.

A deed of appointment would be normal practice to effect the transfer of the trust property on bare trust for the grandchildren (although strictly speaking a deed is not necessary unless so provided for).

If £44,000 was settled 20 or so years ago it is possible that no IHT charge arose at that time (due to an available NRB). After 10 years assuming say a 10% annual compound growth gives a value of £114,125. This would not give rise to a 10 year/periodic charge nor any IHT reporting requirement.

After 20 years on the same assumption the value would be £296,000 producing no actual periodic charge but the possible need for an IHT reporting requirement.

On an appointment out on bare trust (after 20 years) a CGT charge in principle arises albeit subject to hold-over relief (but possibly no actual IHT exit charge).

Malcolm Finney

Hello Malcolm (Finney).
This was a refreshing clarification of the situation and I thank you sincerely for your kind advice.

With kind regards

James Sadd

In one your posts you refer to inheritance tax. There are two potential inheritance tax traps. One has already been mentioned, which is the ten yearly charge applicable where the trust capital is over £325,000. There is another possible ‘landmine’ which relates to the property in the trust. If you are the settlor and the trust asset is a share of a property subject to an equity release loan, one has to ask if the property is the one you live in. If the property in question is your home and you have put it into trust but are continuing to occupy it, then you may be triggering the S103 GROB rules and the property may still form part of your estate. You indicate that there is no income in the trust, which suggests you are not paying any rent to the trust in return for occupying the property (if indeed you do).

I believe the confusion may have been caused by HMRC believing that there is no income or capital gains, hence them not requiring any tax returns. from what you have said thus far, the trust has not been properly terminated and will therefore still exist and possibly still included within your estate for IHT purposes.

Hello Mr McCabe
Thank you for report . In 2000AD The Actual CAPITAL in the Trust was only £44000 and it was paid to Vendors for 66% share of small Bungalow by way of EQUITY release based SOLELY on a 66% share of the property when the owners pass on. They continue to occupy and are NOT required to pay rent for our share of the property.
In fact as it has grown in value over last 21 tears **(currently our share about £200,000 )**and for goodwill I am considering the possibility of REDUCING the Trust benefit to 62.5% , and providing the Vendors with a further sum of six thousand pounds (to include minor repairs which we have paid for thereby our capital investment is a TOTAL of £50,000.
I have not lived in property of course . So I cannot see that the question of IHT is relevant in my case.

  • am getting details together for a local Solicitor who has arranged that an expert he strongly recommends can advise.
    With regards

James Sadd