Client A & B are married and have a jointly owned property worth £500,000 and very little other assets. They have one daughter. In a recent conversation the issue of transferring the property into a trust came up. We had the usual conversation about deprivation of capital and the risks involved but it brought up a discussion between myself and my colleagues.
If the property was transferred into a discretionary trust that the settlors were beneficiaries of the chargeable transfer value would be covered by their nil rate bands but would there be any issue with exit and ten year charges. Or because they are beneficiaries would it be a gift with reservation of benefit and simply pass into their estate anyway.
subject to the above, if the estate did increase above the Inheritance Tax threshold, would daughter, who is a trustee, be able to appoint out the asset to herself to make use of the Residential Nil Rate Band.
we do get asked this question quite often despite our best warnings but the property values are usually much lower so this does not come up.
The gift with reservation rules will not affect the usual tax charges arising in a relevant property trust, as they only deemed the property to be part of the donor’s estate for the purposes of calculating the IHT on death.
The fact that any part of the property is appointed out of the trust does not affect the initial gift into the trust. On the basis that the gift with reservation terminates on a settlor’s death, provided that at that time the property passes to a qualifying person, I believe residence NRB should be available.
However, whilst an appointment out to the daughter during the settlors’ lifetime would result in her being the absolute owner of that interest upon the surviving settlor’s death, this is a scenario that does not appear to be addressed in the guidance and HMRC might take some persuading to apply the allowance. Logic says there is no reason the residence NRB should not be available in these circumstances, but then tax and logic are not easy bedfellows.
An answer may be to terminate the trust on the death of the surviving settlor, giving the trust fund to the daughter or her issue. This could be within the trust deed or the subject of a later appointment (although a later appointment runs the risk of the unexpected death of the settlors).
By coincidence there is another question on the discussion board at the moment from someone who is tangling with the fallout from someone entering into a trust of this nature.
Unless the trust meets the conditions to be a disabled person’s trust the property will be subject to 10-year and exit charges (although its value may be such that no IHT is payable). It would also be in their respective estates as a GROB.
If they have very few other assets then they won’t need the RNRB but if they do require it then the arrangement you describe is broadly incompatible with claiming the RNRB.