Discretionary Nil Rate Sum trust not set up on1st death

I have a case of a client whose spouse passed away in 2008. Under the Will terms a Nil Rate Sum trust was to be set up for the deceased’s share of the property (as the main residence was held as tenants in common in equal shares). The beneficiaries of the trust per the Will were the surviving spouse and their children. The trust was never set up by the surviving spouse. Subsequently, the surviving spouse also removed the deceased spouse’s name from the Land Registry title of the property. By doing this he assumed that he was holding his deceased spouse’s share for himself and his children. The surviving spouse now wishes to make his own Will to leave his entire estate to his children.
My concern is re the implications of not setting up the trust and whether this could be overridden when the surviving spouse sets up a new Will. I have also concerns whether the surviving spouse on his death would be able to claim the deceased spouse’s NRB and RNRB for the benefit of his estate on his death.
On checking the Land Registry document, there is restriction note per s27(2) of the Law of Property Act 1925.
Any comments will help.

Thanks Sunil

The NRB trust cannot just be ignored in law, though I dare say ignoring it in practice is not all that uncommon. It was the responsibility of the executors of the late spouse to set it up and secure an appropriation of assets out of the general estate. You do not say whether her share of the property was specifically left to the NRB trust or whether it was a gift of a sum equal to the NRB. Your query title indicates the latter.

The fact that the survivor has had the deceased’s name removed from the title does not affect the beneficial ownership of the deceased’s interest in the property. If the couple were tenants in common at registration a Form A restriction would have been appropriate and would not be expunged from the title without due cause being shown (Section 7 HMLR PG6). If none was registered there must be an issue about what HMLR were told at registration e.g. on the TR1. It is standard HMLR practice to ask pre-registration whether joint owners are beneficial joint tenants or tenants in common. If the “wrong” answer was given eventually there may be consequences, assuming the tenure was not subsequently changed but without effecting a change in the registration. The beneficial ownership of the share would have passed as residue, if not specifically gifted, in the absence of an appropriation to the trust. So it might in fact have passed to the survivor justifying removal of the Form A. But he or someone was left with an equitable obligation to cough up the NRB sum to the trustees. A limitation defence may be in point but would put the executors in a difficult position, at least theoretically.

A discretionary trust will permit the trust property to be appointed to a beneficiary even all these years later. Most such trusts were set up to save IHT by preventing loss of the NRB of the first to die before TRNB came in. So the survivor is likely to be a beneficiary and an appointment to him may be what the deceased intended and so will not be challenged by other beneficiaries. You do not say who the Will trustees were or are and such an appointment will necessitate first having, or re-creating, a lawfully appointed body of trustees, who can make the appointment. You do not say what the value of the half share was at the date of death and whether within the NRB amount. If it exceeded it only part of the share can be appropriated to the NRB trust with the excess going elsewhere, most likely as residue. An appropriation is messy and not tax-efficient and can be avoided.

The appointment of the half share if appropriated to the trust will involve a disposal for CGT and probably not with PPR, as there may be a technical problem as regards the strict beneficial ownership of the share since the date of death. The appropriation cannot be retrospective and occupation during that period cannot have been under the terms of the trust. Indeed it seems strongly arguable (fortunately!) that no appropriation can be lawfully made now because the executors are no longer in office. So that all that can be appointed is a lump sum which is “owed” to the trustees by whoever has wrongly benefited from the estate to that extent. If that is the survivor e.g. as residuary legatee it should be possible to appoint the sum to him in cancellation of his equitable obligation to make good to the trust that same sum, so without CGT/SDLT effect, and therefore much preferable to a purported appropriation and appointment out. The appointment of a sum would have an IHT RPT effect but the sum was within the NRB and the deceased probably had no cumulation so a 0% rate. Note that there was a 10 year anniversary charge in 2018 but no doubt at the same rate. No IHT for the survivor as s10 IHTA should apply; he is discharging an obligation imposed on him by law. Some of this analysis must be speculative and dependent on unknown facts.

Jack Harper

Thank you for comprehensive and detailed comments. re NRB - it was her share of the property that was left to NRB trust. The Will Trustees were the surviving spouse and another external party and the beneficiaries were the surviving spouse and the children.

That will teach me to jump to conclusions without first seeking clarification, though it would help if crucial facts were not left out of queries!

A preliminary point is that this set of facts is now fairly bristling with rights of action. In the real world no one in the family may be minded to pursue them, although it does not do to be too sanguine about this as families have been known to fall out, especially about money, long after the events as the law reports demonstrate. The theory however cannot be ignored because it will affect the tax analysis and the prospective opponent here is ultimately HMRC. not renowned for its generosity or broad brush.

The legal position is that on death the late spouse’s share of the property belonged to the will trustees because it was a specific gift, since it was not needed to pay liabilities. The executors should have assented to the trustees. You do not say whether they were the same people but in theory even so they would have had separate capacities. Theoretical right of action No 1. The survivor in his own capacity has meddled and is an executor de son tort, theoretical right No 2. The trustees have failed in their duty to secure trust property, theoretical right No 3. Rights of action are chargeable assets for CGT.

The share itself is deemed to be acquired by the executors at market value at the date of death, with a discount for being less saleable, as the deceased was competent to dispose of it: s 62(1) TCGA. But the survivor has taken possession of the asset without owning it so they acquired also a right of action against him, which has the nasty theoretical base cost of nil:s17(2). If the survivor were to dispose of the entire property, the question would arise: what is the effect as regards the share he does not own? Arguably he would act as a bare constructive trustee of the will trustees’ share of the sale proceeds and so the trustees would be deemed to make the disposal for CGT:s60.There is no way that any gain would attract PPR. The trustees would then also dispose of their right of action or would do if they got they hands on the money. Arguably that would not be a “capital sum” received under s22 as it is their own money, so the right would be extinguished without consideration and there would be no separate gain as s17(1) does not apply market value (one would hope HMRC will accept that to avoid double taxation).

The will trustees, if reconstituted as a body, could exercise their power of appointment under the DT (I have not seen the document) to distribute the asset to the surviving spouse. This will trigger a gain without PPR. Hold-over relief could apply, as it is an RPT chargeable event for IHT, but s226A will then prevent a later PPR claim by the survivor. If the gain on distribution would now produce an unacceptably high CGT bill it may be preferable for the survivor to transfer the half share to the trustees (no CGT disposal) who can then permit him to reside (even though he is entitled to do so as joint owner) with a view to begin to clock up some future PPR on the trust share.

A distribution of the asset would put right the conveyancing muddle but could be deferred until a sale was in prospect. The danger is that the taxable trust gain will grow with the value of the property. If nothing is done the the trustees will need to be to be parties to any future contract of sale because the Form A is still extant, as the query indicates. A deed of appointment before sale would allow HMLR to remove the Form A (when they got round to it) and the sale would provide cash to pay the trustees’ CGT. An appointment after sale would have to be of the sale proceeds net of the trustees’ CGT.

The original query was whether the survivor can leave the deceased’s share by a new Will. He plainly can’t as he does not own it. Also he is going to encounter a conveyancing problem on a future sale while the Form A is on the register. I cannot see how he can be made the sole owner of the entirety without some CGT, either now or later, on the trustee’s half share. The Ostrich Strategy is sometimes a lay client’s preference but hoping no one will notice may result in a future nightmare for him or his family if the Form A opens the can of worms when the property needs to be sold, with HMRC leading the charge and advice costs multiplying in sorting it all out later. (Dare I mention TRS?)

Jack Harper