Discretionary dispute

A brother (A) and sister (B) are trustees of a discretionary trust set up in January 2000 following the death of their brother (C).

The main intended beneficiaries are C’s children who were minors at the time. The trust deed specifies that B is the settlor and she made an initial settlement of £10.

However shortly afterwards the trustees of C’s pension scheme added a £150 000 lump sum benefit from the pension to the trust. The money was invested in single premium insurance bonds with a small cash balance.

Occasional lump sum withdrawals have been made from the investment bonds over the past few years to make distributions to the beneficiaries.

The trustees regarded these as capital distributions but they were surprised to be assessed to income tax on them presumably on the basis that C is the settlor.

However the financial...