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How does it work?

• A ‘nil rate band’ (NRB) ‘Discretionary’ trust is created on death in a sum to include property equal in value to the inheritance tax NRB (£325,000 for 2015/16) or the settlor’s unused NRB if already part-used.
• Each spouse/civil partner must own the property as ‘tenants in common’.
• The surviving spouse has the legal right to occupy the property by virtue of ownership of their own half-share.
• The trustees are deemed to own a beneficial 50% share of the property which is effectively subject to a sitting tenant; the property cannot be sold because they do not entirely own it.

Advantages

• Maximum flexibility over the estate; spouse IHT exemption retained, although this point is less relevant now the unused IHT allowance of the first spouse to die is transferable to the surviving spouse.
• No problems should a beneficiary become bankrupt or die.
• If sold, capital gains tax Principal Private Residence relief is potentially available on the value of the property as a whole.
• The remaining estate assets can be left outright.
• Assets held in trust are not assessed as capital of the surviving spouse for long-term care.
• Guarantee that the trust assets pass per the donor’s wishes.

NOTE: HMRC’s guide to ‘nil rate band’ trusts can be found at: https://www.gov.uk/government/publications/nil-rate-band-discretionary-trusts/practice-guide-70-nil-rate-band-discretionary-trusts.Save