Thank you both for your thoughts. So it seems the transferable NRB is not a possibility - and it didn't exist at the time of death (nor within two years afterwards) anyway.
It would seem that the position should be regularised. Thus, trustees should execute a deed of appointment under which the interest in the family home is appointed out to the surviving spouse.
This does not seem to be a very good result from an IHT perspective as it means that Spouse 1's NRB was never used? (If I have understood you correctly.) This seems like a much better option:
Strictly I would argue the trust still exists with all the consequent reporting requirements. The trustees still have the right to receive £325,000 (or whatever the nil rate band was at the relevant time) so I don't see any issues with the 10 yearly charge.
So if the NRB was £225,000 at that point, which would have been, say 50% of the house, and today 50% of the house would be £350,000, yet the trustees only ever had the right to £225,000... then what exactly should be transferred in at this stage? And presumably the trustees are reclaiming this from the surviving spouse? Presumably a straightforward deed of trust signed by the surviving spouse holding it on trust for the trustees would suffice?
https://www.gov.uk/trusts-taxes/trustee ... sibilities
Registering for tax
You need to register a trust with HM Revenue and Customs (HMRC) to pay Income Tax and Capital Gains Tax it owes.
Do this by 5 October of the tax year after the trust is set up (or when it starts to make income or chargeable gains, if this is later). The tax year is from 6 April to 5 April the following year.
Is it the case that the trust, even if it had been set up, would never have had reporting requirements as it would never have had either income or chargeable gains? (The only asset being a chunk of the family home which generated no income and was not sold in the period.) And in which case, provided at the ten year point the assets were less than the NRB then there is no 10 year charge.
I wish I’d paid more attention to this at ATII… Thanks for your help.