In our latest blog series our specialist Trusts Team aim to cover some of the most common issues when navigating the administration of Trusts. This month's highlight Nil Rate Band Discretionary Trusts; what they are, what are the issues and how we can assist.
What are “NRB Discretionary Trusts”?
Prior to October 2007 it was not possible for a spouse to transfer their unused NRB to be used in their surviving spouse’s estate. As a result, the NRB had to be used by the first deceased spouse or was lost.
If all assets were left to the surviving spouse, the value of such assets would be included in the surviving spouse’s estate with only one NRB allowance to set against Inheritance Tax.
To avoid the above, Wills prepared prior to October 2007 often included NRB Discretionary Trusts. Instead of assets passing to the surviving spouse, the value of assets up to the NRB would pass into a Trust to ringfence them from being taxed on the survivor’s death.
What are the issues?
Since October 2007, it has been possible for a spouse to leave all their assets to their surviving spouse with their unused NRB being transferred to the surviving spouse’s estate to set against Inheritance Tax. If Wills are not updated, a NRB Discretionary Trust will still come into effect.
Without advice on the first death, Trustees will not be aware of the Trust and lose the ability to benefit from the transfer the NRB to the surviving spouse’s estate.
Trustees may not be aware of the tax implications (these Trusts fall into the “Relevant Property Regime”) – Inheritance Tax and Capital Gains Tax.
Failure to comply with Trustee obligations – Trust Registration Service / 10-year Inheritance Tax returns (at risk of penalties).
If the NRB Trust was established before 2007 with advice having been sought at the time of death to properly establish the Trust, there may be Charges against the marital home which can have a potential risk for claiming the Residence NRB – as the property value is decreased, there may not be sufficient value remaining to claim the full Residence NRB and transferable Residence NRB.
What are the solutions?
Clients should seek proper legal advice as soon as possible to check whether a first deceased spouse’s Will includes a Nil Rate Band Discretionary Trust.
If surviving spouse has now died, advice needs to be taken to properly record the Nil Rate Band Discretionary Trust so the allowance can be claimed in the estate.
How can we help?
Porter Dodson can assist by:
- Reviewing a deceased spouse’s Will
- Considering the value transferred into the Trust
- Recording assets held in the Trust as tax efficiently as possible
- Reviewing the tax position and submitting the relevant returns
- Registering the Trust with HMRC
- Changing trustees
- Updating the legal title to property
- Advising in relation to terminating the Trust and preparation of the relevant deed and tax returns
- Advising as to whether to retain the Trust / vary the terms
- Advising in relation to estate planning / update of surviving spouse’s Will
Whatever your requirements, Porter Dodson's Trust experts are here to help.