·       The settlor/donor is not a beneficiary of a DGT so care must be taken to ensure that person doesn’t benefit directly or indirectly from the payment.

·       The trustees can distribute part of the trust fund to a beneficiary if the settlor’s/donor’s rights to the pre-selected payment stream aren’t adversely impacted.

·       The tax consequences of the distribution must be considered.

The distribution could be by way of:

1. segment assignment
2. partial surrender across all policy segments followed by distribution to beneficiary.

If route (1) is adopted, the trustees will (in most cases) not be able to meet future payments to the settlor without breaching the 5% tax deferred allowance from the remaining segments. This will mean annual chargeable events. Any tax charge falls on the settlor of a discretionary trust. The settlor has a right of recovery from the trustees. If the settlor does not exercise this right he/she is treated as making a transfer of value for IHT purposes.

If route (2) is adopted, there will be an income tax chargeable event at the end of the policy year if the 5% cumulative allowance is breached. Any tax charge falls on the settlor of a discretionary trust. The settlor has a right of recovery from the trustees. If the settlor does not exercise this right he/she is treated as making a transfer of value for IHT purposes.

The distribution by the trustees to the beneficiary of a discretionary trust will be a transfer of value for IHT purposes (an ‘exit’ charge). In most cases the availability of the trustees’ nil rate band will mean that no IHT is immediately payable.

In the case of an Absolute DGT, if a chargeable event gain arises as a result of the trustees making an ‘emergency’ advancement of trust capital to a named beneficiary (without of course reducing the repayments), then the beneficiary is assessable on the chargeable event gain because that’s just and reasonable. However, what if the ‘emergency’ advancement is funded by segment surrenders. The surrender gain will be taxable on the beneficiary, but the consequence might be that the future regular withdrawals due to the donor might then start exceeding 5% limits. It’s unclear who is then assessable – the donor or the beneficiary. We have posed this question to HMRC and at the time of writing, await a response.

It should be clear to trustees that emergency advances are a ‘solution of last resort’ and the tax and legal consequences need to be fully analysed before action is taken.