When trustees wind up a trust and hand the assets to beneficiaries, the trustees are treated as selling every chargeable asset at market value, so Capital Gains Tax can arise even though nothing is sold. A relevant property trust may also face an Inheritance Tax exit charge, which in turn can allow the gain to be held over. The trustees then file a final return for the period to the end of the trust and close its entry on the Trust Registration Service.

What happens in tax terms when a trust ends?

A trust usually ends because the trustees use a power to appoint the whole fund to beneficiaries, or because a beneficiary meets a condition in the deed, such as reaching a stated age, and becomes absolutely entitled. Section 60(2) of the Taxation of Chargeable Gains Act 1992 describes absolute entitlement as the exclusive right to direct how the property is dealt with, subject only to the trustees’ right to resort to it for taxes, costs and other outgoings. From that point section 60(1) treats the property as belonging to the beneficiary, and the trustees hold it as bare trustees.

Each tax then has its own trigger. Capital Gains Tax looks at the moment of absolute entitlement, Inheritance Tax looks at the property leaving the trust or an interest coming to an end, and Income Tax looks at what the trustees received and paid out before the end. The type of trust decides which of these produce a bill; see types of trust and how each is taxed.

Is there Capital Gains Tax when assets pass to beneficiaries?

Under section 71(1), when a person becomes absolutely entitled to settled property as against the trustees, the trustees are deemed to dispose of the assets and reacquire them as bare trustees at market value. HMRC’s guidance confirms that the trustees pay Capital Gains Tax based on the market value of the assets when the beneficiary became entitled. For 2026 to 2027 trustees pay at 24% and have an annual exempt amount of £1,500, or £3,000 where the beneficiary is vulnerable. The beneficiary takes the assets at that market value as their base cost. More detail is in Capital Gains Tax for trustees.

There are two important exceptions. Assets passing out of a bare trust carry no Capital Gains Tax charge, because the beneficiary already owned them for tax purposes. And where absolute entitlement arises on the death of a person with an interest in possession, section 73(1) provides that no chargeable gain accrues. For interests that began on or after 22 March 2006, section 73(2A) limits this to immediate post death interests, transitional serial interests, disabled persons’ interests and certain trusts for bereaved minors.

Can the trustees hold over the gain?

Section 260 allows gains to be held over where the disposal is a chargeable transfer for Inheritance Tax and not a potentially exempt transfer. A distribution from a relevant property trust is an occasion of charge under section 65 of the Inheritance Tax Act 1984, so the trustees and the beneficiary can usually claim holdover, even if the exit charge itself is at a nil rate. Where the transferee is an individual, section 260(1)(c) requires the claim to be made jointly by the trustees and the beneficiary. The beneficiary’s base cost is then reduced by the held over gain, so the tax is postponed rather than removed; see gift holdover relief.

Timing can block the relief. HMRC’s Inheritance Tax Manual at IHTM42117 points out that no exit charge arises in the first quarter after the trust starts or after a ten year anniversary, or on a distribution from a will trust within two years of death under section 144, and in those cases holdover under section 260 is not available because there is no chargeable occasion.

What happens to losses on the deemed disposal?

If the deemed disposal produces an allowable loss, section 71(2) first sets it against the trustees’ gains on the same occasion and their other gains earlier in the same tax year. Only the balance passes to the beneficiary, and the beneficiary can use it only against a gain on a later disposal of that same asset, or for an interest in real property, an asset derived from it. A loss on shares therefore cannot be used by the beneficiary against gains on unrelated investments.

Is there an Inheritance Tax charge?

  • Relevant property trusts, mainly discretionary trusts, pay an exit charge of up to 6% under section 65 when property leaves the trust, with exceptions for the first quarter and certain other cases. The calculation is set out in exit charges when property leaves a trust.
  • Qualifying interest in possession trusts. If the life tenant’s interest ends during their lifetime, section 52(1) charges tax as if they had made a transfer of value equal to the property in which the interest subsisted. For interests acquired on or after 22 March 2006, section 52(2A) applies this only to immediate post death interests, disabled persons’ interests, transitional serial interests and interests within section 5(1B). If the trust ends on the life tenant’s death, the fund is included in their estate instead; see interest in possession trusts.
  • Bare trusts have no trust charge, because the property already belongs to the beneficiary for Inheritance Tax.

Where a charge arises, HMRC’s guidance requires the trustees to pay the tax and deliver form IHT100 by the end of the sixth month after the event.

What about Income Tax in the final year?

Income that arose to the trustees up to the end is reported on a final trust and estate tax return. In a discretionary trust, payments of income to beneficiaries carry a 45% tax credit that must be covered by the tax pool; capital distributions do not. A final income payment can therefore create an extra liability if the pool is short, explained in discretionary trusts and the tax pool. After a beneficiary becomes absolutely entitled, the trustees hold as bare trustees and HMRC’s guidance treats bare trust income as the beneficiary’s for Income Tax.

Trustees often want certainty before releasing the last of the fund. TSEM2140 explains that HMRC will, if asked, accept a return before the end of the tax year in which the trust ceased, and will give early written confirmation that it does not intend to enquire into that return. HMRC describes both as non statutory practice, and the confirmation does not stop an enquiry in exceptional cases where the return proves incomplete or incorrect. Without it, the normal enquiry window runs for 12 months after the return is delivered.

What admin is needed to close the trust?

HMRC’s guidance on the Trust Registration Service says trustees must use the online service to close a trust that was registered, confirming that the details are up to date and giving the date the trust ended. HMRC asks trustees not to write to it to say the trust has ended. A return may still be needed for the tax year in which the trust ended.

Because trustees remain liable for trust taxes, and Inheritance Tax liability under section 204(2) extends to property that has passed through their hands, it is usual to retain enough to cover the final Income Tax, Capital Gains Tax, any IHT100 charge and professional fees until the position is agreed.

How might the figures look?

Illustration only. A discretionary trust set up eight years ago is wound up in 2026 to 2027 by appointing a portfolio worth £120,000 to one beneficiary. The trustees’ base cost is £80,000, so the deemed gain is £40,000. If no holdover is claimed, the trustees pay 24% on £38,500 after the £1,500 annual exempt amount, which is £9,240, and the beneficiary’s base cost is £120,000. If the distribution is an occasion of charge under section 65 and both parties claim holdover, the trustees pay no Capital Gains Tax and the beneficiary’s base cost becomes £80,000. Whether any exit charge is payable depends on the rate worked out under section 68, which for a trust funded within the settlor’s nil rate band is often nil. Had the appointment been made in the first three months after a ten year anniversary, there would be no exit charge but also no holdover.

What mistakes come up most often?

  • Overlooking the deemed disposal because no asset is sold, or using the original cost instead of market value for the beneficiary’s base cost.
  • Claiming section 260 holdover for a distribution in the first quarter after a ten year anniversary, or within two years of death under section 144.
  • Assuming a trust loss can be passed to the beneficiary for use against any gain.
  • Making a final income distribution from a discretionary trust without checking the tax pool.
  • Leaving the Trust Registration Service entry open, or distributing everything before the final tax bills are known.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.