Unadministered Nil Rate Discretionary Trust and CGT

(kbacon) #1

Deceased client’s wife died 4 years ago leaving a Will containing a cash legacy to Nil Rate Discretionary Trust and leaving residue to the deceased. Assets of her estate were a half share of matrimonial home (held as tenants in common) and an ISA, together less than the NRB. Deceased did not take out Grant of Probate; he reinvested the ISA in his name, and took no action regarding the matrimonial home. Deceased’s estate passes to their 3 children (also potential beneficiaries of the NRDT). House is now for sale and has increased substantially in value since 2014. As the wife’s share has not been appropriated to the trust, and the NRDT legacy remains unpaid, the question is, how should the wife’s share be dealt with - particularly in relation to CGT on sale?

Karen Bacon
Steeles Law Solicitors Limited

(Paul Saunders) #2

If the nil rate band trust has not been satisfied, which seems to be the
case, the trustees are entitled to a cash sum, so there there should not
be any CGT consequences for them.

Whilst the estate may not have been sufficient to fully satisfy the NRB
gift at the time of death, you would need to look at the estate at the
time of distribution (applying the principle in Re Charteris 1917).
Although the assets have been transferred to the husband I consider they
are still subject to payment of the NRB and, therefore, if their value
now exceeds the amount necessary to satisfy the NRB, including
interest, that will be a debt of the husband’s estate.

Paul Saunders

(Carmen Cottingham) #3

These Trusts are deemed to be established if the trust assets are not appointed out within 2 years of death.

An application for probate will be required and funds up to the value of the NRB should be passed to the trustees to hold on behalf of the discretionary beneficiaries.

It is not necessary to have assets that equate to the full NRB as this can be part satisfied by the wording of the declaration and minutes of trustee meeting. These documents will then be available on second death to claim any unused NRB to transfer against any IHT the surfing spouses estate may incur.

It would also be good practice (if there is potential IHT on second death) to re-write the surviving spouses Will without the NRB trust in and pass their share of the property to direct descendents. This would allow for a claim for the RNRB therefore, maximising IHT reliefs and mitigating any IHT.

Carmen Cottingham
Cottingham Legal Wills and Probate Limited

(kbacon) #4

Hi Carmen

Thanks for your response, the problem is how to deal with CGT arising on increase in value of the share of the first spouse in the house, now that the second spouse has died without the first spouse’s share having been dealt with – do you have any thoughts on that?

Kind regards
Karen Bacon
Steeles Law Solicitors Limited

(peter) #5

As the Estate of W was not properly administered, the legacy to the Trust remains unpaid and the home remains registered in joint names, presumably with a Form A Restriction to reflect the tenancy in common. The residue of the W’s Estate passed to the H.

To correct the position, the Wife’s death should be notified to the Land Registry enabling the legal title to be transferred into H’s sole name. Application can also be made to remove the Restriction (RX3 (?) + Statement of Truth). Property is then in H’s sole name together with all other W’s assets.

Legacy to Trust becomes a debt in H’s estate. H’s estate consists of the whole value of the property plus other assets, less liabilities including debt to Trust. Thus on sale of property by H’s Estate (presumably principal residence) no CGT arises (unless increase between DoD value and sale).

The value of the unpaid legacy to the Trust will have to be ascertained at date of W’s death if her assets were below IHT threshold. The legacy will also bear interest from the first anniversary of W’s death until payment at the appropriate rates.

On a practical note, unless the Trust is to be retained, I would look carefully at whether payment of interest can be avoided (Consider Trustees powers, potential beneficiaries and practicalities) as often the receipt of income by the Trust can give rise to administrative expense and tax consequences, the cost of dealing with which can make the payment of interest uneconomical.

Peter Hughes
Hughes & Company

(Carmen Cottingham) #6

Hi Karen,

If the surviving spouse continues to reside in the property then on their death there will be a free uplift for CGT purposes.

With kind regards

Carmen Cottingham
Cottingham Legal Wills and Probate Limited

(kbacon) #7

Hi Carman

Do you mean that main residence relief applies even though share of first spouse to die had not been transferred to survivor before his death?

Kind regards

Karen Bacon
Steeles Law Solicitors Limited