Property into a nil rate band discretionary trusts

[bob.fraser@towrylaw.]

According to HMRC figures, 70% of the IHT "take" in 2004 was from estates valued at £500,000 or less.
I surmise that the bulk of this was made up of the family home.
Nil rate band planning would have eliminated this IHT liability, but the NRB would have required the house to be used.
I therefore repeat my caution about the IOU (as opposed to the charge) arrangement as far as SDLT may be concerned.
I also repeat my advice to use a fully experienced solicitor, ideally one who is a member of STEP.

Bob Fraser
Chartered and Certified Financial Planner

[Peter D]

I agree with Bob, an IOU regards a trust that holds a property is vunerable, whereas a trust that purely holds money it well tested and not under unr attact from the last budget. Regards Peter

[dino14]

I agree with Bob, an IOU regards a trust that holds a property is vunerable, whereas a trust that purely holds money it well tested and not under unr attact from the last budget. Regards Peter

Historically putting the property into the trust has never been popular because of the risk that the Revenue may treat the arrangement as another form of trust which does not carry the IHT advantages

Sorry to dig this old thread up, but in what sense is a trust that holds property and an IOU 'vulnerable' or 'at risk'?

My situation is that my mother's will has set up an NRB discretionary trust (she died in September). This could be funded either with her half of the shared property (total value £400,000) plus investments/cash up to £325,000, or with purely investments/cash; with everything else passing to my father in each case. Our plan is for him to then make Potentially Exempt Transfers to his children, since he does not need the money, and he trusts us/our spouses. If the investments/cash were lent to him by the trust, and he wrote an IOU for them, he could give us more gifts since he would have more investments/money, and his share of the house would be enough to fulfill the IOU. The PETs will start to benefit from some taper relief 3 years from now (they would total more than the NRB), and if he survives 7 years, there may be no IHT to pay at all.

The one advantage of putting my mother's half of the house into the trust is that HMRC apparently accept a discount of between 10 and 15% on the value of a house whose ownership is split, and so, rather than the trust being a half share worth £200,000 and other assets of £125,000, it could be a half share of £180,000 and other assets of £145,000 (and since the will specifies it should consist of the full NRB, it seems we would have to put in that £145,000, unless we appoint some of the money to my father instead within 2 years).

But if a trust with property and investments/cash is 'vulnerable' or 'at risk', then mixing the 2 may be a bad idea; in which we might have to decide between a trust purely of the half of the house (which should get that discount in value, allowing, I hope, a larger share of an unused NRB to be transferred to my father), or a trust purely of investments/cash, which could then lend them all to my father, who would own the entire house which would be sufficient to repay the IOU.

Any ideas on the risk of a trust with property and an IOU?

[Loza]

I cannot see the logic of using a NRB trust at all since after 9th October 2007 the NRB is transferable to the surviving spouse.
If the whole estate passes to an exempt beneficiary (the spouse) then the NRB of the wife is retained.
The discount for jointly owned assets only applies to joint owners who are not married or in a civil partnership.

[Lee Young]

Firstly to defend the comment I made you must understand the changes made recently to the tax treatment of trusts. Before those changes our concern was always that having part of a property in a discretionary trust (hard to exercise a discretion over the beneficiary's occupation of that propoerty when he or she owned the other part of it) would convert it from a discretionary trust to an interest in possession trust which then would not get the benefit of the IHT savings anticipated. Since the change in the defintion of what constitutes an interest in possession trust (now an IPDI) that fear has in my mind completely gone away (subject to an any challenges the revenue may mount, and I am not aware of any at the moment). Hence the use of the word historically.

Peter will no doubt defend himself, though I agree with the basic tenor of his argument.

Not sure I agree with Loza entirely - from the limited position of IHT a NRB trust achieves litle because of the transferable nil rate band, but if my view there are still IHT advantages and trusts have many other uses. The future of IHT is uncertain still in my mind and therefore Iwould prefer to rely on what I know works, rather than a relief that could very easily disappear or be restricted beyond recognition.

[dino14]

Thanks, Lee - I hadn't really noticed 'historically', and, given you posted very shortly after the changes about IIP trusts were announced, I can see why you said what you did.

The discount for jointly owned assets only applies to joint owners who are not married or in a civil partnership.

That's interesting - the solicitors who drew up my (married) parents' wills are proposing some sort of scheme which relies on getting the discount. They've been rather vague about the details (they don't want us to to implement it without paying their fairly steep fees, I guess), but seem confident they can get HMRC to agree to at least a 10% discount. Because of their vagueness (and since we met them once after my mother died, when they gave the vague explanation, they are asking for a fee to talk to them again), we are looking at going to another firm (the one that did the conveyancing for my parents' house).