A trust is wound up (brought to an end) when all of the trust’s assets are distributed to the beneficiaries or to another trust, either directly or by way of resettlement. Whether the trust is wound up early or because the trust has come to the end of its permissbile life (a maximum of 80 years for a non-charitable trust) certain formalities are required to record the end of the trust.
Care is also requried to establish whether any tax liability arises due to the transfer of assets when a trust is wound up.
Although gift duty was abolished with effect from 1 October 2011, any gifty duty liability incurred prior to that date will survive the end of a trust.
Loss of continuity
The continuity rules for shareholdings do not contain any exceptions that address a loss of continuity because a trust is wound up.
Distributions of capital made on winding up the trust are treated as any other capital distribution and will be tax-free to the same extent as would have been the case for an earlier capital distribution. See classificaiton of trusts for tax purposes.
Any losses are lost when a trust is wound up
Any losses retained on winding up will be lost. There are no provisions that allow tax losses to be distributed to the beneficiaries when a trust is wound up.
Winding up the trust will cause the cessation of a taxable activity for GST purposes
If the trust is GST registered there will be a cessation of the taxable activity on or before the winding of the trust. A final GST return will be required and the trustees will need to de-register the trust from GST.
There are practical matters for a trustee to attend to when winding up a trust
The act of winding up the trust itself is normally the the result of a trustee resolution and may or may not also require a deed to effect the winding up.
Although there are limited if any legal formalities there are practical matters to attend to. These include:
Winding up a trust does not remove any liability a trustee has for tax
The trustee will remain liable for the trust’s tax liabilities following the winding up of a trust. Once the trust’s assets are fully distributed the trustee’s right to indemnity from the trust’s assets is practically limited. For this reason a trustee may wish to seek personal indemnification from the final beneficiaries for any shortfalls or liabilities in respect of any tax obligations, prior to making the final distribution of the trust’s assets. Where a beneficiary will not provide a satisfactory indemnity the trustee can apply to the Court for directions in this matter.