How does it work?
- The ‘Discretionary’ trust is created on the first spouse/civil partner’s death by placing his or her share of the property into the trust.
- At the trustees’ discretion the loan monies are given to the remaining spouse/civil partner as beneficiary. The loan is kept by the trustees as a debt of the estate until ‘called in’ on the death of the second spouse.
- The surviving spouse will normally have no personal liability for the charge which can be index-linked to take into account future increases in the inheritance tax (IHT) nil rate band (NRB).
- Alternatively, the charge can be expressed as a proportion of the value of the property calculated periodically thereby benefiting from any capital appreciation, or be made to track a publicly available index of property prices for comparable properties.
- On the second death the loan from the trust is repaid out of their estate. The NRB is applied to the remainder of the estate assets.
- The property remains owned by the surviving spouse who benefits from either the capital gains tax Principal Private Residence relief should the property be subsequently sold, or a base cost uplift if retained until death.
- On the death of the surviving spouse IHT will be payable but reduced by the charge and, if calculated correctly, to below the NRB.
This is a sample tip taken from our 112 page guide: