Hi,
Looking at the Will of deceased spouse (died 02.2021) and there was a ‘Nil Rate Sum’, which has been totally ignored as the Trustees are the children and did not require the money (Trust has now been registered with TRS).
Spouse 2 has now died and the question is does IHT418 require completing as the Will states ‘The Nil Rate Trustees may refrain from calling in the Nil Rate Sum (or exercising any rights in relation to the Nil Rate Sum) for as long as they think fit’. Also the clause ‘The provisions of this clause shall not be exercisable so as to give any person an interest in possession in the Nil Rate Fund’.
As mentioned, Trustees are the 3 children who have confirmed nothing has been put into the Trust and no monies paid out, so if the Trust has never had any property then is IHT418 relevant?
IHTM43016 is cryptically unhelpful save that it indicates that HMRC are well aware that some taxpayers discover that an unconstituted NRB DT in the Will of the first spouse to die will kybosh a claim for TNRB on the survivor’s death.
The only argument that is likely to sway them is a plausible one that the trust was not valid; simply not constituted will not do, as prima facie the trustees have a duty to pursue the trust property into the hands of those who received assets from the estate which should have gone into the trust. They are volunteers and the time limits to action by the trustees are long.
The OP trust has 2 bizarre features for a DT. The first apparently allows the trustees to do nothing, though they must act before the end of the perpetuity period (or within any defined shorter “trust period”). There is a risk that a judge might find this extraordinary latitude repugnant and hold that they must actively and regularly consider the position of the discretionary objects but unlike one of them HMRC have no standing. It does not absolve the trustees from breach of trust for failing to get the trust property into possession, again not a point for HMRC. Even if the appointed trustees can successfully argue they have not accepted office and refuse to act the Court will appoint.
None of these matters invalidates the trust.
The second corker is that the trustees’ powers are limited to making outright distributions. Odd, but no effect on validity. Therefore I need not go into the IHT consequences of invalidity.
IHT418 is not relevant as it applies to a QIIP of the deceased. The DT is irrelevant to the deceased’s estate save that it scuppers a TNRB claim.
Presumably the DT served some tax saving role on the first death, but, whether or not, it seems unwise for it to stay as is. If it is inconvenient to constitute it, it may be possible to get rid of it by the trustees making outright appointments to those persons who would be the proper targets of any action to recover trust property by tracing or money in lieu. The obligation can then be set against the distribution and discharged in each case. It is often the fact that the persons who have received too much from the estate are discretionary objects. There may be other objects who could object to being left out but they will face the thankless task of asserting that the trustees have not considered them, so the trustees should record that they have done so but dismissed their potential claims.
Collapsing the DT will not affect the IHT chargeable on the first death and will not allow a TNRB claim on the second since s144 cannot operate later than 2 years after the first death.
The Trustees are the only Beneficiaries on the death of the second spouse (which has now happened). There was no saving of IHT on the first death, but as you state, this does not matter as something needs to happen now.
There is sufficient cash in the Estate to deem this as Trust property and this could be used as the distribution up to the NRB.
There is a clause which I am unsure what it means- ‘My surviving spouse may undertake to pay the Nil Rate Sum personally’…what does this refer to, and another point is ‘My Executors may charge my Residuary Estate instead of paying the Nil Rate Sum directly’ and 'Regardless of the value of the property charged the charge will be in substitution for payment of the Nil Rate Sum by the Executors to the Nil Rate Trustees and my Executors shall be under no further liability in relation to the Nil Rate Sum.
Just trying to understand what they need to do, obviously the IHT418 is not required, however the Grant for the first death had a net value of £143,762.21, so is some of the TRNB still available?
I think that these 2 provisions indicate the advice the deceased may have received as to how the trust might be constituted: either from the survivor’s entitlement under the Will or by way of equitable charge over the assets comprised in residue, allowing the residuary legatee(s) to enjoy the assets in kind (so typically property or chattels rather than cash or investments) subject to the charge (and most likely only until sale). Theoretically the trustees could distribute the thing in action which is the benefit of the charge.
The TNRB works on a percentage basis, in basic terms, of how much of the maximum available to the deceased on his death, £325,000, was then used. If it was all used, nothing is available. If half was used then TNRB is 50% of the NRB as it is at the second death. This gives some benefit of any increase in the NRB amount between the 2 dates of death. If no NRB is used on the first death the survivor will have a double NRB, twice the amount then operative.
I assume that as the half of the residential property was left in Trust and the IIP has come to an end, will there be any CGT to pay for any increase in value of the half of the residential property left in the Trust, or will Private Residence Relief be available for the full value?
From reading various notes, I believe TRNRB is still available and this will be based on the value of the residential property at first death?
Are you saying that the deceased’s Will, in addition to the DT, left the survivor an IPDI in his half share of the couple’s main residence?
If so:
1 For IHT the deceased has not used his RNRB at all so it is transferable against the estate of the survivor, before her own NRB is applied to it. The estate means her entire estate. It is not specifically allocated to the settled property in which the QIIP terminated.
Whether the survivor’s estate is entitled to any RNRB or TRNRB depends on whether the estate
contains a qualifying residential interest that is closely inherited.
It is possible to closely inherit the QRI in each of the trust and free estate but we are not told who inherits these. If the children inherit the free estate interest, specifically or via residue, that will do and if they are remaindermen with absolute interests in the settled interest that will also do. Other more exotic legatees may be available for closely inheriting. But it is more fun to answer without key facts!
The amount of relief depends on the value of the QRI (or both if both are relevant) at the date of the survivor’s death. It is the lower of that value and £350,000 where both RNRB and TRNRB are due. This amount is deducted from the total estate value and then the NRB. The tax payable is then apportioned rateably according to their respective values to the free and settled estates. This will only matter if burden of tax falls on different beneficiaries. This assumes that the total estate value does not require the taper to be applied or exceeds even maximum taper.
For CGT there should be a revaluation of the settled property to market value under ss. 72 or 73 TCGA with no chargeable gain or allowable loss. Same result for the free estate under s62. So PPRR is not relevant.
Thank you for your replies and the time you have taken. Having spoke with the Executors, the person who helped with the Will has stated ‘remember the property is in Trust’, however, no where in the Will does it state this, and a clause I have found specifically states ‘the provision of this clause shall not be exercisable so as to give any person an interest in possession in the Nil Rate Fund’, so if I understand this correctly, the property should not be in the Nil Rate Fund even though it was ‘Tenants in Common’, as if it was then it would form part of the Estate of second death as the second spouse continued to live in the property without paying rent. As IHT418 is not relevant, I assume that IHT405 should then show the property owned by the second spouse, and provide a covering letter to HMRC explaining that the property was never in the Trust (due to taking the amount in the trust over the NRB)?