Single-premium trust

My client is a trust established in 1998 by M for her two children who at that time were 22 and 17. The trust invested in a single-premium life policy and has had no other assets.

The settlor/trustee now wishes to cash in the policy distribute the proceeds equally to the two beneficiaries and wind up the trust.

I am told to assume that the children are basic or 40% taxpayers.

I am assuming that the life policy rules mean that the profit on cashing in the policy will be subject to income tax (with a number of 5% credits for the intervening years).

However what are the rules for the distribution to the children? Would this be a distribution of capital or income?

Given the amounts involved I do not think that an exit charge will be in point – but will a tax return be...