Beneficiary wishes to assume deceased's debt to nil rate band trust

I am dealing with an estate where the first spouse to die had a nil rate band legacy in her will. On her death many years ago, the surviving spouse provided an IOU to the trust in the usual way.

On the second death, we have claimed a debt to the estate of the second spouse, which HMRC has accepted. We are now dealing with the administration of the estate of the second spouse. We had expected to appropriate some assets (as there isn’t enough cash) in satisfaction of the debt owed to the trust. The beneficiary of the trust is the same as the beneficiary of the estate of the second spouse. That beneficiary has now said that he will “assume” the debt and will provide an IOU to the trust. I find that a bit troublesome because in my view, that is someone else deciding to take on the deceased’s indebtedness to the trust.

My concern is that we have reduced the IHT payable on the estate of the second spouse by claiming this debt. If someone takes over the debt, even if a beneficiary (of both trust and estate), are we still justified in claiming a reduction in the value of the estate as a result of a debt owed by the deceased to the trust? Something about it makes me uncomfortable.

I believe what the beneficiary wishes to do is to establish is a liability against his own estate if he should die but without ever paying any physical assets to the trust.

Any perspectives on this would be very much appreciated. Many thanks.

On the second death, the IOU for the nrb was offset, but in fact there was insufficient assets to meet the debt. As such, the allowance accepted by HMRC was incorrect as according to the information given I would say the the estate was insolvent, but that shortfall in my opinion cannot be a liability on the beneficiaries estate as it was a debt by others.

If the beneficiary chooses to accept this, then it would seem to satisfy the winding up of the estate, but perhaps I have missed something ?

Thanks for responding @SenorSam80.

I think you may have misunderstood me. There are enough assets, just not enough case. We were planning to appropriate some assets in satisfaction of the debt. As such, the estate was not insolvent and is in a position to pay back the IOU. Therefore, the debt was properly allowed by HMRC (at this stage).

However, during the estate administration, the IOU has not been repaid by the estate. Instead, the trustees of the NRB trust have chosen to accept an IOU from someone else (who happens to be a beneficiary of both the estate and the trust, but I think that is irrelevant) in satisfaction of the debt owed by the estate to the trust.

I am therefore asking whether, considering that the estate is not paying back the debt to the trust (rather someone else is paying it, albeit via an IOU), the executors right to claim the liability as a reduction to the estate in the IHT account?

Surely, if the debt is assigned to the beneficiary to whom the debt is owed it is extinguished as you cannot be both debtor and creditor at the same time.

My recollection is that when s.175A IHTA 1984 was put in place, it was at least in part aimed at this sort of arrangement.

I am inclined to think that if the proposals were shared with HMRC, the debt would be disallowed regardless of the identity of the party to whom either the liability or benefit of the debt was assigned.

If HMRC would continue to allow the debt as allowable for IHT purposes notwithstanding the proposed arrangement (question – does DoTAS apply?), perhaps the beneficiary of the trust might consider gifting the benefit of the debt to their spouse/civil partner, if it has not already been extinguished.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals