NRB Discretionary Trust, Income Tax on Residential Property

[JohnNeedsHelp]

My father died in 2018. My solicitor is preparing the IHT forms. My father’s estate is small and there will be no IHT to pay. When my mother died in 2006, a Nil Rate Band Discretionary Trust was established: it represented half of my father’s only residential property, no assets held directly. HMRC were notified of the Discretionary Trust in 2006, but they did not register it because there was no expected tax liability. My solicitor calculates a gain of £50,000 by the Trust - and that I will incur £22,500 income tax at 45%.

Is this correct? Do gains relating to my father’s Principal Private Residence count as income with regard to the Trust? Does the Trust need to be declared In the IHT Forms (given it is redundant and there is no HMRC record of it)? Or is there a means of disbanding the Discretionary Trust, to avoid this huge tax payment?

I hope someone can advise me…? Thank you.

[AGoodman]

It all depends on the specific circumstances.

If the trust was funded with a charge over the property or an IOU (basically any form of debt), and the outstanding sum was tied to an index (property prices, inflation etc), HMRC are taking a firm position that the gain is subject to income tax because it is akin to interest. They are relying on the fact that it is not in anybody's interests to challenge that view for relatively small sums but the practical position is that you have to accept it.
If this is the case, it may be possible for the trust to waive the interest, so avoiding the charge. It all depends on specifics.

If the trust was funded with an actual share of the property, I would expect CGT or no tax on the gain.

You could distribute the trust but that would not in itself get rid of any tax liability.

[JohnNeedsHelp]

AGoodman, Thank you for your assistance.