Interaction of QIIP with NRB Discretionary Trust

Trusts Discussion
1

Hi All,

I’m currently acting for the executors of a deceased’s estate that includes an NRB Discretionary Trust. the deceased also appears to have a QIIP in their parent’s home.

Brief terms of the deceased’s will are:

  • Personal Possessions to spouse (sentimental value only).
  • Residuary Estate held as follows:
    • 100% Relievable Business Property and ‘Nil Rate Sum’ to NRB Discretionary Trust
      • Nil Rate Sum defined as the maximum amount of cash which I can give on the terms of the Nil Rate Fund without incurring any liability to Inheritance tax on my death.
      • Any other legacy is to be paid in priority but the gift of PP’s should not affect this.
    • Remainder held on trust with life interest for spouse.

I’m unclear on how to ascertain what would ultimately be payable to the NRBDT in this case where to work out the IHT payable the two entries are added together and NRB deducted globally from the aggregate estate (rather than the QIIP being reducing the NRB first like it would if they were failed PETs or priority legacies free of IHT in the will).

Would it be a case of dividing the available NRB by the aggregated estate value then multiplying it by each entry to work out the proportion of the NRB used by each? E.g:

QIIP of £100k + free estate of £700k = £800k

NRB of £325k / £800k = 0.40625

QIIP of £100k x 0.40625 = £40,625 NRB used

Free estate of £700k x 0.40625 = £284,375 NRB used

So the NRBDT could receive up to £284,375 with remainder of £415,625 passing to spouse?

How then would any tax burden be allocated given the remainder of the free estate passes to the spouse?

Would it be a case that the QIIP would bear tax of £23,750 and the residue would bear £166,250 (total tax of £190,000 on an aggregate estate of £475k after deduction of NRB) even though it passes to the spouse?

Or would the tax payable only be the £23,750 where the spouse exemption would apply to the £415,625 remainder that isn’t covered by the NRBDT but passes to the Life Interest Trust?

Any thoughts greatly appreciated. I seem to have fallen down a rabbit hole with this on a Friday afternoon!

3

If the NRB legacy is only payable if it doesn’t give rise to any IHT liability on death, if ANY IHT is payable that legacy must be nil (applying the principle from Woodland Trust v. Loring [2014] EWCA Civ. 1314.

In the example, as the QIIP is £100,000 it seems to me the NRB gift is whatever the balance of the deceased’s NRB might be. If not utilised at all during their lifetime this would be £225,000.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

1 Like
4

Thanks for the steer on that, Paul.

I hadn’t looked at that case and thought I may be overcomplicating given the apparent intention of using the NRBDT to try and avoid an IHT liability on the deceased’s death. Will take a full read through it this week.