CGT or IHT on house in trust

[Cloisters]

On my fathers death in 2003 his nil rate band allowance was transferred into a pre prepared discretionary trust, the remaining value of the house was left in my mother name.

I believe this was common prior to IHT being posthumously transferrable between spouses and also the introduction of the RNRB.

Since that time the trust value of the house has increased about 10% more than the nil rate band (including RNRB) so we thought it wise to leave the trust functioning.

However, I've now realised that on my mothers death and the sale of the property, the trust may become liable for CGT which may negate this approach.

The forums thoughts would be gratefully appreciated.

In addition tot he CGT potential liability, I wonder if the trust could be negated on my mothers death and the RNRB and transferrable nil rate band used during probate?

I feel this crosses many disciplines so hope I have chosen the correct forum?

[AGoodman]

Assuming a share of the property was put into the trust then, when the property is sold, the trustee(s) should benefit from PPR relief under s.225 TCGA as a result of your mother occupying it.

You will want to make sure that your mother is a beneficiary (she should be) and the trustee(s) have consciously decided to allow her to occupy it.

There will likely be a small IHT charge (just a few %) when the property or proceeds of sale are distributed.

No you cannot re-use your father's NRB; it has already been used.

[Cloisters]

Thank you.

Could you please explain why you say there will be just a few % of IHT to pay please?

[AGoodman]

There are two IHT charges on discretionary trusts.

The first is on each ten year anniversary of the trust. These would have been in 2013 and 2023. That will be 6% of the value in the trust in excess of £325k.

The second is an exit charge. This is more complicated but is capped at 6% and is also proportionate to the time passed since the last anniversary. A distribution in 2026 for example, would be three years after the last anniversary so the absolute maximum of 3/10 * 6% = 1.8%.

[Cloisters]

Many thanks for that explanation. I had understood that as the surviving spouse is still resident and owns the remaining 20% of the property not transferred to the discretionary trust, that the 10 year charge does not apply? Do you think that is wrong then?