We have several clients who placed their private residence into a discretionary trust before the new rules on the IHT Additional Threshold.
HMRC states:
The additional threshold will not apply to transfers of a home or any other assets to a discretionary trust before a person died. This applies even if the beneficiary is a direct descendant or if they are entitled to the assets in the trust.
I’m assuming anyone who has been sold an assets protection trust will now lose the additional threshold?
The RNRB applies where a qualifying residential interest is owned by the deceased at the time of death. Settlement of the residence in a discretionary trust in lifetime would mean this requirement is not met.
However, the FA 2016 downsizing provisions could apply but only if the disposal of the residence occurred on for after 8 July 2015.
The residence nil rate band is only available to set against the transfer of value occurring on death. A lifetime gift of the home into a discretionary trust will typically be a gift with reservation assuming the donor continues to live in the property without paying rent. In that case, the house is not part of the estate on death, but it is deemed to be part of the estate. The house will qualify for the residence nil-rate band only if it is regarded as being ‘closely inherited’ on death. Where a gift with reservation has been made, it is the person to whom the gift was made who is deemed to inherit it (s. 8J(6) IHTA). Since the gift was to a discretionary trust, rather than to a lineal descendant etc. of the donor, the residence nil rate band does not apply.
It seems there may, potentially, be a way around this problem, which would enable the residence nil rate band to be claimed, if during the lifetime of the donor, the terms of the trust are changed, so that section 8J(5) will apply to the trust interest at death. It would be interesting to see what others think of that.
It is hard to see how this situation could be rescued, given the changes to 8J(6) made by the Finance Act 2019.
At one time it may have been possible to fall within 8J(6) if the trustee was the direct descendant - it was only necessary for the direct descendant to be the donee (which could include a trustee).
However, for deaths after 29 October 2018 the home must form part of the lifetime donee’s estate for IHT (when the gift is made). For an inter vivos trust this can only happen if the gift is to a disabled person’s trust.
Regarding 8J(5) I cannot see a way in which the trust could be engineered so that it is deemed a QIIP on the death of the donor.
By QIIP you mean an IIP that falls within s. 49(1A) IHTA. But section 8J(5) just refers to D having been beneficially entitled to an IIP, it doesn’t mention s. 49(1A) (at least I can’t see any reference to it). That is why it might be possible to come within s. 8J(5) - although I confess it seems to me to be a drafting error that goes against the scheme of the legislation as most people would understand it.