The residence nil rate band is only available to set against the transfer of value occurring on death. A lifetime gift of the home into a discretionary trust will typically be a gift with reservation assuming the donor continues to live in the property without paying rent. In that case, the house is not part of the estate on death, but it is deemed to be part of the estate. The house will qualify for the residence nil-rate band only if it is regarded as being ‘closely inherited’ on death. Where a gift with reservation has been made, it is the person to whom the gift was made who is deemed to inherit it (s. 8J(6) IHTA). Since the gift was to a discretionary trust, rather than to a lineal descendant etc. of the donor, the residence nil rate band does not apply.
It seems there may, potentially, be a way around this problem, which would enable the residence nil rate band to be claimed, if during the lifetime of the donor, the terms of the trust are changed, so that section 8J(5) will apply to the trust interest at death. It would be interesting to see what others think of that.
Clarke Willmott LLP