Discretionary Trust Tax? — Scope | Disability forum
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Discretionary Trust Tax?

thenortherngirl Community member Posts: 2 Listener
Hi, I have been on disability benefits for a long time, initially incapacity benefit and now ESA legacy, at the higher/old rate. It is unlikely my situation will change as in the past 5 years my health as deteriorated even more. 
My father created a new will this year and set up a discretionary trust for me as the primary beneficiary - he also added a secondary beneficiary for if anything happened to me.
He'd been trying to put the house into trust for several years and was at risk of signing everything over to some random company so I recommended the coop as a reputable company, so as to protect my benefits. 

He sadly passed away last month and I am in the process of getting someone to do all of Probate (although may cancel this and do it myself as its more than 10% of his bank balance). His entire estate including property is less than £200,000 so no IHT issues

However during this process I've stumbled upon the fact that discretionary trusts can be subject to quite high tax and it may not have actually been the best thing to do. I'm not sure if I've understood correctly and want to try and get some info before i involve the trust, as someone's suggested i do a variation of deed to bypass the trust and risk not having ESA for a little while. 

If the discretionary trust paid me up to £1000 it would be subject to 20% tax? 
If they paid me £5000 to my bank account, it'd be taxed at 45%? (Though i believe i can get a tax refund afterwards but again would be minimum 20%?)

Alternatively, if i tell the trust i needed £5000 to pay for a new bathroom, or to upgrade my car to something more suitable (we'd been looking at getting a car for me most of this year but, to say he's awkward would be an understatement but, my current car leaves me in pain after sitting in it - even as a passenger seat). If they paid the bill directly, it wouldn't be subject to the same tax rules? Would there be any tax in that scenario?

As it stands at the minute, with the cost of a full probate service and 20% minimum tax, it would be only marginally above the £16k limit and if we'd actually realised that instead of "all you have to do is ask" i don't think my father would have gone ahead with the trust either. 

So really am thinking of doing it all myself and not using the trust either.
His house if i move into it (versus selling it), does need a little bit of work - new bathroom, kitchen at the bare minimum. 


  • thenortherngirl
    thenortherngirl Community member Posts: 2 Listener
    Just a little update:
    The probate service have said they can wind the trust up for me, via deed of appointment. I asked them to confirm what tax implications there could be if i kept it and the response was to use a tax specialist so that tells me everything I need to know! 
  • Albus_Scope
    Albus_Scope Posts: 1,496 Scope online community team
    Hi @thenortherngirl, I just wanted to send my condolences and also to welcome you to the community.  

     It definitely sounds like using a tax specialist may be the safest path here! 
    Albus (he/him)

    Online Community Coordinator @ Scope

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  • MW123
    MW123 Scope Member Posts: 240 Pioneering

    Hello thenortherngirl 

    Firstly, may I offer my belated condolences on the loss of your father. 

    When a discretionary trust makes distributions to beneficiaries, the tax treatment depends on the amount and nature of the distribution. Discretionary trusts can be subject to various tax charges, such as the 10-yearly charge, exit charges, and periodic charges. 

    It is possible to vary a trust deed to change the terms or beneficiaries of the trust. Any changes should be carefully considered and executed with professional advice. Making direct payments from the trust for specific purposes (e.g., home improvements) may have different tax implications compared to cash distributions. 

    If you choose to handle the probate and winding-up of the trust yourself, you may still be responsible for paying any fees or costs incurred by professionals or individuals who were previously involved in the process. The exact fees will depend on your prior agreements with them. It's important to review these agreements and discuss how to proceed with them. However, please keep in mind that winding up a trust can be complex, so ensure you can manage the process effectively to ensure compliance with the law. 

    If you get stuck speak with an accountant. Since 2014, accountants have been granted the legal authorisation to provide Probate services. If you require guidance, consider consulting an accountant, as a significant portion of the tasks associated with the Probate process are financial in nature. These tasks include activities like compiling financial statements and determining tax obligations. 


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