Chris Gillman – Trust Specialist
A trust may come to a natural end. This may for instance occur when a life tenant dies, a beneficiary becomes fully entitled to capital and income, or the trust has run its term (all trusts established after 5 April 2010 have a maximum term of 125 years). In the case of bare trusts, they will end whenever beneficiaries have reached the age of 18 and requested that the assets are transferred to them.
Alternatively, a decision may be made to wind up a trust, and this decision can be made by the trustees potentially in conjunction with the beneficiaries:
- The assets may have dwindled to such a low level that it is no longer cost effective to continue the trust;
- It may be desirable to fully appoint the trust assets to beneficiaries, for example in order to assist them with house purchases;
- The trust may have served its purpose, for example providing funds for educating specified beneficiaries;
- A lift tenant of a possession in interest trust may wish to terminate their interest for the benefit of the remaindermen;
- The beneficiaries may have become too numerous with conflicting needs, and the trustees may wish to establish new trusts to better benefit different classes of beneficiaries; or
- The logistical difficulties of dealing with offshore trusts and changes in the long-term intentions of settlors may mean they wish to wind up offshore trusts or transfer their assets to an onshore UK trust.
Winding up procedures
Trust deeds may stipulate procedures to follow when winding up a trust. It is essential that trustees consult the trust deeds and carefully adhere to these procedures. In summary, the key stages involved for the trustees in winding up a trust are as follows:
Obtaining tax advice
The winding up of a trust can create significant tax liabilities – capital gains tax and inheritance tax – and it is essential that professional advice is obtained to ensure that everyone – trustees and beneficiaries – are aware of their liabilities, and that these liabilities can be mitigated where possible.
Drafting legal documents
The trust deed may stipulate that a simple resolution will suffice for winding up the trust, but more commonly a new deed is necessary to close the trust and distribute the trust assets. The deed should be drawn up by a solicitor and signatures must be witnessed. It is also usual for the trustees to request an indemnity from the beneficiaries at the same time as the deed of appointment, and this should also be drawn up by a solicitor.
Preparing final accounts and tax returns
Final accounts should be prepared so that the trustees have a clear picture of the trust’s assets and liabilities, and hence quantify the assets available to distribute to beneficiaries. The tax returns need to be prepared to quantify any tax liabilities, and to close down the trust’s record with HMRC.
Paying any outstanding liabilities and dealing with practical issues
All outstanding liabilities – tax liabilities, investment management charges, solicitor fees etc – should be paid by the trustees. Ideally before the distribution of assets to the beneficiaries, but if not, enough money should be retained to settle the liabilities before assets are distributed. Any practical issues should also be dealt with such as closing down any bank accounts etc.
Transferring assets and distributing money to beneficiaries
Once the trust assets have been transferred, the trust will effectively be closed down. Trustees should transfer the assets and register any change of title that may be necessary.
Contact Menzies Trust services team
Menzies can assist trustees by providing tax advice, preparing final accounts and tax returns. Please get in touch if you are thinking of winding up a trust and would like any advice.