Tax implications of dissolving a trust

[rabbitman]

Hi, could I ask a few questions about the tax implications of dissolving a trust? We are living in my wife’s family home which was built by her grandfather and where she was brought up. Her father passed away in 2016 and her mother has Alzheimer's and has now moved into a nursing home because her condition has advanced to the stage where she cannot be looked after safely at home.

Many years ago, in the 1970s, my wife's grandfather essentially left this house to her in his will. At the time she was very young so the idea that that the house would be kept for her in a trust. There was a provision for her parents to be able to live in the house for the duration of their lives before the house could be passed to her, although neither of her parents have ever had any financial interest in the property.

We had a couple of valuations from local estate agents in recent months and at the time one said they’d market it at £550k and £580k respectively.

We need to know how we stand from a tax position when my wife does finally take control of her house? As her mother has no financial interest in the house, would we still be liable for inheritance tax when she does finally leave us? If so, my understanding is that we could put both of her parent’s allowances against any liability and, along with the residence nil-rate band, there should be no tax to pay. Is that right?

As the property has always been the family home since it was built and has never been bought or sold, I'm guessing that there would be no CGT to pay either.

And someone has mentioned something called Trust Tax. Is that a real thing and if so, how would it affect us?

Many thanks,

Tony

[AGoodman]

You may be okay but a lot turns on the exact wording of the trust.

If your in-laws had a right to occupy the property (rather than the trustees having power to allow them) then there is a good chance that the parents have/had an interest in possession.

If so, and your m-in-law now has the sole right to occupy, the property will be included in her estate for IHT. She may, as you say, have two nil rate bands and it is possible that she will also have one or two RNRBs. The latter is complicated so somebody needs to ensure it would apply in this specific situation where she does not own the property nor is leaving it by will. If, as I suspect, the property is in her estate, there will be a tax free CGT uplift so you do not need to get into PPR.

Points that need some consideration:
(a) did/do parents have a right to occupy (an "interest in possession")? If not, the trust might be discretionary and there could be 10 year charges to pay (6% of the value once every 10 years) and more when the trust ends.
(b) what happened on f-in-law's death? If he also had a right to occupy your m-in-law may now have what is called a "transitional serial interest" under s. 49D IHTA. This would mean the spouse exemption applied on his death and the property will continue to remain within m-in-law's estate. Somebody needs to check this and ensure the spouse exemption applied. They may have done at the time.
(c) does m-in-law's right to occupy continue to apply despite her having left the property? This is a question of how the trust deed was written.
(d) what is the value of m-in-law's own assets; these will be added to trust assets when calculating the tax.

No such thing as "trust tax" but there are trust rates of income tax and capital gains tax. They may be referring to the form of inheritance tax payable by some trusts on 10 year anniversaries and capital distributions.

Given the values, I would definitely get an expert to consider the wording of the will trust and check the points listed above. If all is fine, (and f-in-law had a personal right to occupy) there should still have been a trust IHT return submitted when he died.