Key considerations for trustees: Navigating lump sum advances from a Trust

Published by Aaron Brinkley on 11 June 2024

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Trustees’ have various considerations to make when deciding whether to advance a lump sum from a Trust to a beneficiary or beneficiaries.  

These include balancing the needs of each beneficiary, the age and responsibility of each beneficiary, the differing tax implications depending on the Trust type and the different asset classes of the Trust.  

There are two main types of Trust, being interest in possession and discretionary Trusts, and the treatment for interest in possession Trusts will depend on when the Trust is created.  

There are other types of Trust such as accumulation and maintenance Trusts and disabled Trusts among others, however for simplification I will only be discussing the considerations for interest in possession and discretionary Trusts. 

Qualifying interest in possession Trusts

An interest in possession Trust is created when a beneficiary or beneficiaries are given a right to receive the income during their lifetime. This means that they are taxed on the income of the Trust as it arises, regardless of whether this is actually paid out to them.  

If an interest in possession Trust was created before 22nd March 2006 or created on death by a will, the Trust will be a ‘qualifying interest in possession’ Trust. This means that the Trust assets are not ‘relevant property’ for inheritance tax purposes and the assets will be aggregated with the estate of the beneficiary or beneficiaries. 

When advancing a lump sum to the qualifying beneficiary this will have different capital gains tax (CGT) implications depending on the type of asset. In all cases this will not have any inheritance tax (IHT) implications as the assets being advanced are already part of the beneficiaries’ estate for IHT purposes. 

If cash is advanced this is not a chargeable asset and this will not have any CGT implications.  

If residential property or listed stocks and shares are advanced, an immediate CGT charge could arise on the difference between the base cost when put into the Trust or purchased within the Trust and the market value at the advancement date. If the asset is not sold this will create a large ‘dry’ CGT charge and funds will need to be available to settle this liability. 

If a beneficiary has occupied a residential property there is also an interaction with Private Residence Relief rules to be considered. This is a specialist area and advice should be sought regarding this.  

If assets qualifying for Business Property Relief (BPR) or Agricultural Property Relief (APR) are advanced from the trust, holdover relief will be available for CGT purposes. This means that the capital gain will be deferred and the beneficiary will receive the asset at it’s original base cost. 

Non-qualifying interest in possession Trusts and discretionary Trusts

A non-qualifying interest in possession Trust is created in lifetime post 22nd March 2006. This type of Trust and Discretionary Trusts will be ‘relevant property’ for IHT purposes. This is a separate IHT regime for Trusts, on which IHT is charged on each 10 year anniversary of the Trust’s existence and ‘exit charges’ when capital sums leave the Trust. 

Exit charges will be taxed based on the rate of IHT when the assets were put into Trust within the first 10 years.  

If the advance is made after the first 10 years then the IHT rate applied on the Exit charge will be the rate at the most recent 10 year anniversary.  

If the value of the Trust is below the nil rate band of £325,000 or £650,000 if there are joint settlors, the rate of IHT will be 0% on the assets advanced. This means that the assets can be advanced without any IHT liability arising. 

If the assets exceed the nil rate band, an IHT rate will be applied, which can be up to a maximum of 6%. 

The charge is also pro-rated by the number of quarters which have passed between either the creation of the Trust or the most recent 10 year anniversary and the date the advance is made. 

As an inheritance tax charge arises, the capital gains tax charge can be deferred by a holdover relief claim as covered earlier. This means that the beneficiary will take the asset at the original base cost. 

Practical implications regarding the beneficiaries and legal documents

Other considerations for the Trustees when deciding to advance a lump sum to a beneficiary will include the age and responsibility of the beneficiary. Some Trust Deeds are written to include a vesting age for a beneficiary at age 25 or 35, however Trustees may approach this point and decide that the beneficiary is not ready to receive the assets at this age. They may then need to complete a further deed to extend the vesting age. 

There also needs to be consideration regarding balancing the interests of the beneficiaries in regard to capital and income. For example, a Trust may have beneficiaries who have an interest in the income and other beneficiaries who have an interest in the capital.  

If a lump sum advancement is made of listed shares to a capital beneficiary, this may disadvantage the income beneficiary by reducing their income and will need to be carefully considered before proceeding.  

The Trustees will also need to review the deed to determine whether a deed of appointment or a simpler Trustees resolution is required to formally record the advance from the Trust, and a solicitor will need to be engaged to prepare these documents. 

If you require any further advice regarding making a capital advance from a Trust, please contact our Trust team for further assistance. 

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