I have been asked to advise on a difficult tax/trust situation.
In August 2003 a husband died, and his will created a Nil Rate Band Discretionary Trust, leaving a surviving spouse, two children as beneficiaries. One of the children was in the US. The surviving spouse, the UK-based child and a local solicitor (now retired) were trustees. Value of the estate, primarily house, was around GBP 450K. In June 2006 an equitable charge, linked to the trust, was created over the property, although no legal advice was given to the spouse or trustee child at the time (indeed the charge has a date when neither was in the country). The charge was NOT registered with the land registry, the trust was never registered with HMRC (no ten year filing), no trust accounts were ever produced, and no minutes of any trustee meetings were taken after 2008, and there was never a meeting with all trustees. There was no (identifiable) contact between the solicitor and either of the other trustees after 2006.
In January 2017 the surviving spouse (mother) passed away. The probate value of the house was now GBP 950K. The mother’s will left all assets equally to the two children, with no mention of the trust. Following advice of a different local solicitor, who was aware of that one of the children was a US citizen, since 2015, but did not mention that there could be US tax implications, they filed a UK IHT return that deducted the index-linked value of the equitable charge. The US child reported his receipt of the share of the estate to the IRS, but the trust itself was not reported. The US child was however made a trustee of the NRBDT based on this new solicitor’s advice once the retired solicitor trustee had been located. The property has now been registered by the Land Registry as equally, and absolutely, owned by the children.
An accountant has now made the children aware that closing the trust may create knotty problems with historical failure to report in both the UK and the US.
Before recommending they go down the route of closing the trust and dealing with consequences on both sides of the Atlantic, I am wondering if it is possible to argue to HMRC that the trust/charge was never properly created in this case. I think it is clear that the non-solicitor trustees or beneficiaries did not understand what was involved with the trust or charge. This would require amending the UK IHT return.
If this is not possible, would it be appropriate to vary the mother’s will in some way, while we are in the two year window, to at least avoid the US citizen from being deemed a beneficiary of the trust, so that the problems are kept in one jurisdiction?
Ian McClean
Slade Advisors