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Where Taxpayers and Advisers Meet

Nil rate band will trust never set up

Incredulum
Posts:2795
Joined:Thu Dec 03, 2009 5:35 pm
Nil rate band will trust never set up

Postby Incredulum » Thu Aug 03, 2017 3:07 pm

Spouse 1 died more than 10 years ago. In the will was provision for a NRB discretionary trust to be set up with a part of the family house. In the event no trust was set up and the full value of the house transferred to the surviving spouse – together with all other assets.

What happens on the event of the death of Spouse 2? Does Spouse 1’s NRB transfer to Spouse 2? Or has a trust been set up – that has never been acknowledged – that (might) owe some 6% tax upon the tenth anniversary of the death?

A quick trawl of the ‘net finds an article stating that unravelling of a NRB Will Trust after three months and before the second anniversary of the death of Spouse 1 allows transfer of the unused NRB to Spouse 2, courtesy of s144 IHTA 1984. Is pure failure to act the equivalent of a Deed of Appointment being executed by the Trustees paying out the funds to the surviving spouse? I guess, the trustees (who never were of the trust that never was) being the executors, who did appoint the property to Spouse 2 at the right time, might indeed have managed this. And as it was a transfer of land it was (I think?) by Deed.

Thanks for your thoughts on this.

Lee Young
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Joined:Wed Aug 06, 2008 3:26 pm
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Re: Nil rate band will trust never set up

Postby Lee Young » Tue Aug 08, 2017 8:44 am

I have no experience of what HMC will do in this situation now, but certainly prior to 2006 HMRC would have argued in these circumstances that the surviving spouse received the property either outright or had an IIP in it in which case the value was aggregated with their free estate and taxed accordingly (and before 2007, with the benefit of only one nil rate band). Since 2006, and the introduction of the very specific definition of an IPDI and what would otherwise not qualify for IHT aggregation, I think this is more difficult to argue for HMRC.

Strictly I would argue the trust still exists with all the consequent reporting requirements. The trustees still have the right to receive £325,000 (or whatever the nil rate band was at the relevant time) so I don't see any issues with the 10 yearly charge. Claiming the transferable nil rate band will be impossible because of the terms of the will of the first to die and the absence of a deed of appointment done within the two years.
Lee Young
Solicitor, Chartered Tax Adviser and Trust and Estate Practitioner


Partner, Frettens LLP
lyoung@frettens.co.uk
01202 491701

maths
Posts:8507
Joined:Wed Aug 06, 2008 3:25 pm

Re: Nil rate band will trust never set up

Postby maths » Thu Aug 10, 2017 6:13 pm

I don't disagree with Lee's comments.

I would add:

Trusts created by will are properly constituted from the date of death.

Thus, the trust is exposed to 10 yearly etc charges.

Presumably under the will of the first spouse to die a sufficient proportion of the family home was settled on trust (equal to the then NRB) with the balance (if any) being left absolutely to the surviving spouse.

The s144 IHTA 1984 option is unavailable as more than two years have lapsed since death. Accordingly, the NRB of the first spouse to die would have been used and thus on the death of the surviving spouse only one NRB is available (plus possibly one RNRB).

It would seem that the position should be regularised. Thus, trustees should execute a deed of appointment under which the interest in the family home is appointed out to the surviving spouse.

Incredulum
Posts:2795
Joined:Thu Dec 03, 2009 5:35 pm

Re: Nil rate band will trust never set up

Postby Incredulum » Fri Aug 11, 2017 10:34 am

Thank you both for your thoughts. So it seems the transferable NRB is not a possibility - and it didn't exist at the time of death (nor within two years afterwards) anyway.
It would seem that the position should be regularised. Thus, trustees should execute a deed of appointment under which the interest in the family home is appointed out to the surviving spouse.
This does not seem to be a very good result from an IHT perspective as it means that Spouse 1's NRB was never used? (If I have understood you correctly.) This seems like a much better option:
Strictly I would argue the trust still exists with all the consequent reporting requirements. The trustees still have the right to receive £325,000 (or whatever the nil rate band was at the relevant time) so I don't see any issues with the 10 yearly charge.
So if the NRB was £225,000 at that point, which would have been, say 50% of the house, and today 50% of the house would be £350,000, yet the trustees only ever had the right to £225,000... then what exactly should be transferred in at this stage? And presumably the trustees are reclaiming this from the surviving spouse? Presumably a straightforward deed of trust signed by the surviving spouse holding it on trust for the trustees would suffice?

https://www.gov.uk/trusts-taxes/trustee ... sibilities
Registering for tax
You need to register a trust with HM Revenue and Customs (HMRC) to pay Income Tax and Capital Gains Tax it owes.
Do this by 5 October of the tax year after the trust is set up (or when it starts to make income or chargeable gains, if this is later). The tax year is from 6 April to 5 April the following year.
Is it the case that the trust, even if it had been set up, would never have had reporting requirements as it would never have had either income or chargeable gains? (The only asset being a chunk of the family home which generated no income and was not sold in the period.) And in which case, provided at the ten year point the assets were less than the NRB then there is no 10 year charge.
I wish I’d paid more attention to this at ATII… Thanks for your help.

maths
Posts:8507
Joined:Wed Aug 06, 2008 3:25 pm

Re: Nil rate band will trust never set up

Postby maths » Fri Aug 11, 2017 10:21 pm

maths wrote:
It would seem that the position should be regularised. Thus, trustees should execute a deed of appointment under which the interest in the family home is appointed out to the surviving spouse.


This does not seem to be a very good result from an IHT perspective as it means that Spouse 1's NRB was never used? (If I have understood you correctly.)
No.

Spouse 1's NRB is utilised. As indicated above, the trust us constituted effective on death and hence the NRB is used. Section 144 IHTA 1984 that relates appointments out of a DT within 2 years of death as if the testator had made the appointment is inapplicable (ie the appointment out to a spouse within 2 years would then result in Spouse 1's NRB not being used).

What I'm saying is that as Spouse 2 acquired the interest that should have been settled then I think that this must be regularised and hence the suggested deed of appointment (s144 not applying).As appropriations are typically made at the value as at the date of appropriation (not date of death) then it would seem that the trustees are only entitled to that proportion of the home that equals the NRB as it was at the date of death (eg 40% of the property). This is the % appointed out.

Whatever happens the Executors are on the hook.

AnthonyR
Posts:322
Joined:Wed Feb 08, 2017 2:33 pm

Re: Nil rate band will trust never set up

Postby AnthonyR » Tue Aug 15, 2017 9:37 pm

Bit late in with this one. I think we need to understand a bit more, but in theory if the Spouse was also the executor, they could in theory be holding the trust's share on it's behalf. In practice, I agree with Lee that I believe that the Will trust would be created and effective simply through the Will and the fact that it has been ignored historically does not change that fact.

The next question is what to do about it. Spouse 1 has used their NRB, so Spouse 2 only has a single NRB (plus potential RNRB x2). Assuming the share held by the trust is below £325k there's no periodic charge issues. So why not just leave it as is? The trust owns £225k worth of property the Spouse owns £475k with possibly minimal exposure to IHT.

Assigning the asset out to Spouse 2 just means their share is £700k and exposed to considerably more IHT?

Although it's late and I might be missing something....
Anthony Rogers LLB CTA TEP
Fusion Partners LLP
anthony@fusionpartners.co.uk

maths
Posts:8507
Joined:Wed Aug 06, 2008 3:25 pm

Re: Nil rate band will trust never set up

Postby maths » Tue Aug 15, 2017 11:01 pm

The trust owns £225k worth of property
But does it?

Incredulum states that 100% of the property is owned by the surviving spouse. The trustees never received their entitlement. No assent of any interest in the property has occurred.

Incredulum
Posts:2795
Joined:Thu Dec 03, 2009 5:35 pm

Re: Nil rate band will trust never set up

Postby Incredulum » Thu Aug 17, 2017 2:49 pm

Thank you for your thoughts.

The surviving spouse is an executor of Spouse 1's will; as are their two children.
Whatever happens the Executors are on the hook.
Not sure what you mean they are on the hook for; is this a good thing or a bad thing?! All parties, by the way, are friendly.

Do you agree that the trust, if indeed it was set up at the time, has never had any filing requirement with HMRC - provided it did not breach the £325k limit on the tenth anniversary of its creation?

maths
Posts:8507
Joined:Wed Aug 06, 2008 3:25 pm

Re: Nil rate band will trust never set up

Postby maths » Thu Aug 17, 2017 9:24 pm

My comment re the executors was a bit of a throw-away comment but was also intended to point out that they have the responsibility of ensuring the testator's wishes are carried into effect and potentially personally liable for any IHT due but not paid.

Regarding IHT filing requirements I'm not sure that the trustees do not have to file IHT100 on the 10th anniversary whether any IHT is due or not. I haven't checked the Regs but feel that the trust may not qualify as an Excepted settlement

AnthonyR
Posts:322
Joined:Wed Feb 08, 2017 2:33 pm

Re: Nil rate band will trust never set up

Postby AnthonyR » Tue Aug 22, 2017 6:38 pm

Do you agree that the trust, if indeed it was set up at the time, has never had any filing requirement with HMRC - provided it did not breach the £325k limit on the tenth anniversary of its creation?
Reporting threshold is 80% of NRB (£260k) unless the assets are only cash/quoted shares in which case it's only reportable if there's a tax charge. So assuming there is a trust then you would only need to file an IHT100 if the value is over £260k.

Maths - the issue I see is the question of whether the distribution of the share of the property to the spouse was within the powers of the executors.

I am also assuming that the tenancy had been severed as well (assuming being a dangerous thing). Obviously if it was a joint tenancy it would automatically pass through survivorship, rather than via the trust anyway.

I guess a potential option is to argue that the distribution from the estate assuming (again) it was within 2 years was a distribution under s.144 (which I believe is automatic if qualifying) which in theory means that the TNRB and TRNRB would be available?
Anthony Rogers LLB CTA TEP
Fusion Partners LLP
anthony@fusionpartners.co.uk


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