I have been asked to advise on winding up a nil rate band trust following the death of the wife. The testator husband died in 2007 when the NRB was £300,000 leaving an estate worth £120,000 so that it is all held on the terms of the trust. A charge was placed over the main residence and index linked at RPI. The accumulated interest and capital is now £170,000.
My view is that the trust is entitled to the full nil rate band for the calculation of exit charges and the wife can claim 60% unused transferable nil rate band.
I am second guessing myself because it seems too generous from the IHT perspective and there is no CGT payable as far as I am aware because it is a simple debt and s.251(1) and (5) apply (presumably if the charge itself is appointed out to beneficiaries.) The only relevant tax seems to me to be income tax on the interest which was then accumulated, which of course, has never been disclosed or paid.
Am I wrong? I’ve spent ages going through the manuals and I can’t see I am wrong but it doesn’t feel right.
My concern would be the potential impact of s.175A IHTA 1984 if the debt is assigned to the beneficiaries rather than satisfied out of the property or, if it is not to be sold, out of the widow’s estate.
The income tax on the interest is only due when the interest is “received”. It may be that the trustees have power to waive the interest. However, they will need to consider if such waiver might give rise to a breach of trust, which would depend upon the particular circumstances of the trust.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
I suggest you use the search tool on this forum for “indexation“ where are you will find a lot of useful comment. Below is a posting of mine which was never commented upon in the forum but as you can see, HMRC won the day on the taxing of the indexation. If the beneficiaries of the trust are the same as those of the surviving spouse, I would advise that the trustees of the trust waive the indexation since otherwise they will pay tax at 45% on it and this is likely to be greater than the saving of IHT which would be made if the charge + indexation was claimed by the executors as a debt of the estate.
“At long last, I recently received a decision from HMRC regarding our claim that indexation was not liable to be taxed as income or capital gain. With their letter HMRC sent an appendix running to 3 pages setting out their view as to why indexation is taxable as income. In the 1st paragraph they state:-
“HMRC remains of the view that the indexed uplift of the the principal loan in the case currently under enquiry is chargeable to income tax as interest under s369 (1) ITTOIA 2005. It is HMRC’s view that only if, broadly speaking, the loan carries a commercial rate of interest in addition to the uplift to the principal determined by reference to the Retail Price Index (RPI) or any similar index, the uplift may be regarded as capital (and only then provided that the loan agreement specifically referred to the relevant index). In any other circumstances the uplift is taxable as interest within s369”
They then go on to quote from the legislation and from various cases in support of their view.
Fortunately in my case, we paid the tax when it was due but made it clear that the trustees did not accept HMRC’s view for the reasons quoted in James Kessler’s Drafting Trusts etc.
Although there is a right to appeal against the decision and a right to request an independent internal review, it seems to me that there is little point in doing this. Incidentally the tax liability was, as previously stated in one of my postings, just over £30,000.
I wonder if others have had the same decision from HMRC.