I am hoping for some advice on the following issue.
My client was executor to her husband’s estate and after his death entered into a deed of variation in 2005 setting up a NRB discretionary trust.
Subsequently there are minutes of a meeting of Trustees which specify that “…the Nil Rate Fund shall have a value equal to the unused portion of his nil rate fund…” and further on “It has now been agreed that the Trustees will be entitled to the nil rate sum of £263,000.00”. It goes on the state that this will be satisfied by an equitable charge over the property and will be subject to index linking".
My queries are:
On her death will the wife’s executors be able to claim the unused portion of the husbands NRB as only £263,000.00 was actually used?
Will the index linking element of the charge be subject to income tax.
Would it be possible to bring the trust to an end or transfer it to a life interest trust instead?
I think the nil rate band in 2005 was £263K which means the NRB was exhausted and there is nothing left to transfer (it is the unused percentage that transfers). The index linking will be treated as trust income by HMRC. The trustees could waive the indexation as it is a fairly pointless exercise to save IHT at 40% but pay income tax at 45% (although this could be mitigated - see below).
The trustees will usually have full discretionary powers so are able to appoint a life interest or distribute the trust fund to any of the potential beneficiaries. This will remain a relevant property trust regardless of any life interest. As the 2 year window has past, husband’s nil rate band cannot be restored. If a deduction of £263k is not sufficient for the IHT position, you could look at deducting the indexation and then appointing the income out to basic rate or non tax paying beneficiaries if there are any so that it is subject to income tax at their marginal rates.
Did the trustees agree to accept £263,000 as that was the distributable value of the husband’s estate, or for some other reason?
If there was an abatement, then to the extent that the full entitlement under the NRB gift could not be satisfied, the widow’s PRs should be able to claim the unused portion.
If the trustees accepted a lesser sum than that to which they were entitled, the answer may depend upon the exact circumstances.
There have been previous discussions as to whether the index-linked gain is taxable, and whether it is liable to income tax or CGT. It is certainly regarded as being taxable by HMRC, but is there now a statutory basis for this?
As I understanding, there has been no court ruling to support that view, rather a lack of will (and funding) to challenge the HMRC assertion, so they get away with it.
I have previously paid income tax on the index linked element of an I.O.U between a trust and beneficiary. I was subsequently asked to explain why I had paid it as the accountant didn’t seem to think it necessary. I was advised by HMRC that it was. The IOU was a debt to the beneficiaries estate. The index linking was in their opinion interest. If the trustees can waive it’s payment then that would solve my issue.