Passing an asset through a NRB trust

[B001966]

Hi all

hopefully someone may be able to help with my confusion... ! I'm a firm believer in self help first and have tried to research but getting stumped...

I have a family NRB tust with half a house (325k) in which was set up for IHT purposes.

Recently a distant relative died and has left a residury legacy (120K in cash) to the trust.

The trustees of the trust want to pay the money straight out to beneficieries.

I am confused by the taxation position (and hope there would be none to the trust or to the beneficiaries)

My logic is this;

The legacy comes without CGT

It enters the trust as capital and leaves the next day. As there is no capital gain there is no CGT to pay and as there was no income on the capital, so no exit tax (or tax credit).

The beneficary recieves the capital as a legacy from a will and has no tax to pay

Am I correct.... it just seems a little too easy?!

As a supplementary question I presume this can all be executed under a letter explaining what is happening , signed by the executor and the trustees so that we don't need to set up a bank account for the trust for just one transaction. How would I infom HMRC as I have nothing to hide.

Many thanks for any input you can give.

[tax_schmax]

The crux of your dilemma is what tax do I pay. You hit the nail on the head, no gain = no CGT, no income = no income tax. However, there are exit charges from some trusts. You need to explain what type of trust you have, who the settlor is, when it was set up, what other property has been in or through the trust and if any distributions have been made.

I have a nagging question; why did a distant relative use your trust. It seems to add nothing and has caused you some minor concern.

[B001966]

thanks Schmax...

it is a discretionary trust, settlor was my father in law set up 12 years ago, no other property involved apart from initial £10 to open the trust and the "half a house" that went in on death in late 2010. No distributions have been made.

I understand the nagging question.... it has caused us some issues... its a long family story, basically the relative outlived the settlor which wasn't planned....

[tax_schmax]

Discretionary trusts require exit charges to be paid. There is a relatively low rate of tax applicable. The following link will be useful here. http://www.hmrc.gov.uk/trusts/iht/transfers-out.htm

Who established the trust? Under what power did the relative make a contribution to the trust? Did the "half a house" get settled upon death?

[B001966]

The trust was established by my late father in law in 2001 while he was alive, half the house was settled on death in 2010 to absorb IHT NRB (it was all set up before the change in legislation)

The subsequent relatives contribution is a direction from her will.....long family history.

Thanks for the link to HMRC, I get the exit charge but I thought this was for IHT issues. As far as I can understand the Aunts will is a seperate second settlement to the trust and as such does not contribute to the IHT issues of the father in law's estate and should be taxed seperatley. (of course I may be wrong and mis understand the purpose of the exit charge)

Whilst it is not a tax issue, I wondered about investigating a Deed of variation of the will to get legacy redirected to the beneficiaries directly, although as the trustees and beneficiaries are the same it might be a conflict and I don't know if the trustees have the same power as an individual to agree to such variation...... just thinking aloud

with no CGT/ Income or IHT is seems that teh monies could be passed through tax free... but I'm not an expert.....

thanks again.

[maths]

The simplest option is for the trustees on receiving the £120K to simply appoint it to the appropriate beneficiaries.

No income tax nor CGT issues.

Re IHT, as you indicate, the £120K forms a separate settlement for IHT from the other assets comprised in the trust (effectively there are two settlements).

Thus, the appointment out of the £120K should precipitate no IHT exit charge.

I would avoid the DoV option; it's not necessary.

[tax_schmax]

As far as I can understand the Aunts will is a seperate second settlement to the trust and as such does not contribute to the IHT issues of the father in law's estate and should be taxed seperatley.

Indeed. If there is a separate settlement for your Aunt, this has nothing to do with your father-in-law. The settlement into her trust can go in and come out again immediately, fairly simply. Your father-in-laws trust is completely separate and should be ignored. It will not be unusual for the same trustees and beneficiaries to be on several trusts. I'm not sure why you think they are linked. Perhaps there could be some missing detail in your question, which is always the risk on forums such as this.

I imagine her will established a discretionary trust as many do. A deed of variation could undo this, but as mentioned above, if your Aunt's settlement can be confirmed as being entirely separate from your father-in laws, everything under the nil rate band should be free of IHT. If as you state in your original question, free of income or capital gains, there should be no other taxes either.

[B001966]

Hi

just for clarity, the aunt's settlement will be into the father in laws's existing trust and not into a new seperate trust in her own name.

From what maths says, it is a second settlement which I think is dealt with as a seperate taxable event. (I'm sure I read an HMRC page on this somewhere). being below IHT limits no tax is due... phew

Thanks for your help in the matter, I just need to figure out how to make the transactions happen and keep the records straight... I'm sure there will be many forms to fill in from HMRC... and I'm not even a beneficiary!

Am I weird in that I actually find all this quite interesting...? I guess on this forum I wouldn't be classed as weird, but simply normal

Kind regards

Boo

[maths]

From what maths says, it is a second settlement which I think is dealt with as a seperate taxable event. (I'm sure I read an HMRC page on this somewhere). being below IHT limits no tax is due... phew

Correct.

Not "weird" just sad.........like the rest of us!!