Loss of RNRB or not

Trusts Discussion
1

Dear respected colleagues

Mr and Mrs P set up a Discretionary Trust in 2016 and transferred their home into it. The Deed of trust states that Mr P is to be paid the income from one half of the trust during his lifetime and after his death the income from Mr P’s half is to be paid to Mrs P. There is a mirror provision in the Trust Deed for the other half of the trust fund. After both Mr and Mrs P’s death the income is to be paid to the other beneficiaries (children of Mr and Mrs P) as the trustees think fit.

Mr P died in 2018 and his will left his whole estate to his wife. Mrs P died in May 2025 and her will leaves her whole estate to the discretionary trust dated 2016 above. At the time of Mrs P’s death the home is valued at 750,000 and Mrs P had cash in the bank of £10,000(circa).

My questions are: On Mr P’s death, his estate comprises of his half of the home because he was still benefiting from living at his home and his estate is entitled to the spouse exemption. On Mrs P’s death can she claim Mr’s P’s unused NRB so that her estate has the benefit of 2 x NRBs. Can we do a deed of variation to Mrs P’s will to redirect her estate directly to the children and not into the trust. If yes, who signs the deed of variation?

Your insights into the above are much appreciated.

Audrey Feegrado

2

On Mr P’s death, his half of the home is within his estate under GROB rules but I am not sure it benefits from the spouse exemption. The life interest his wife receives under the trust is not an IPDI as it fails Condition 1 under s.49A (“the settlement was effected by will or under the law relating to intestacy.”). It therefore fails the s.18 test for the spouse exemption that the assets falls into the estate of the spouse. That would be a chargeable transfer of half the 2018 property value, using up Mr P’s NRB.

The TSI rules don’t apply as the settlement commenced after 2006.

Hopefully I’ve missed something in the above analysis!

If I haven’t, then there may not be much NRB to transfer. There would be a RNRB + transferable RNRB if Mrs P left her half of the property to her children. Unfortunately, none of the home was in her estate and it passed onto discretionary trusts so I don’t see how you could effect this. Both the RNRB and TRNRB are lost.

3

If the house went into the DT in 2016 and has been in it ever since, it has since then ceased to be part of either spouse’s free estate since then. The fact that they lived in it is irrelevant. There is in each death estate no qualifying relevant interest for RNRB.

The transfer into the DT was a GROB by each spouse so 50% of the house was taxable on the death of the first, utilising all or part of the husband’s NRB and reducing or eliminating TNRB. On the second death the other 50% was taxable.

A transfer which is a GROB is not the disposal of a qualifying former residential interest, so no downsizing addition: s.8H(4D). A GROB property can itself be a QRI but it is not “inherited” when the gift was to a DT rather than outright to an individual: s.8J(6).

The DT is an RPT, in fact two such: s.44(2). Each spouse will have made a CLT probably using their nil rate band and each survived it by 7 years. So these transfers did not cumulate with their respective death estates. If each had a nil cumulation before the transfers, each trust will have a full NRB and the first TYA will be in 2026.

CGT will doubtless be covered by PPRR on entry into the trust and on a future disposal by the trustees (a non-exempt period will begin 9 months after the second death, although hold-over will be available in principle on a distribution of the asset).

If the couple had done nothing it seems their combined estates would have been entirely outside IHT if the house had been “closely inherited” on the second death. So 2 RNRBs of £350k in total have been wasted. The wife’s NRB of £325k will probably be available to offset her GROB and only TNRB if the husband’s NRB exceeded the then value of the GROB on his death. There is a likelihood that on the wife’s death there will be a charge to tax as the value of her GROB at £375k plus £10k = £385k will exceed her NRB, so £60k is taxable subject to TNRB. That will be the excess if any of £325k over the value of a half share of the estate at the husband’s death. I hope that any tax payable on the first death has not been overlooked because I expect probate was skipped.

A consolation prize seems to lie in the valuation of each GROB at each death. The related property rules do not apply to DTs made by spouses. On the first death a discount of 15% should be due as the wife was then in occupation under her own trust. On her own death the value just before it should be 10% on the basis that one must assume that only the half interest is for sale but a sale nonetheless with vacant possession as no other person was then in occupation.

On the facts there may be a tax charge on either or both deaths which was totally avoidable because, on a “do nothing” basis, total headroom of £1million would have been available on the second death if the spouse exemption had applied on the first death. DTs cost money to set up, run, and end. All that is likely to have been achieved is care fees protection provided there was no deprivation of assets at set up. Avoiding probate is a mere bagatelle if IHT formalities must still be processed, and an estate containing a GROB cannot be an excepted estate.

Why do lay clients allow themselves to be railroaded into these arrangements? Presumably it is not something that was divinely vouchsafed to them on a mountain top as happened to Moses. Whoever advised on this deserves to be sued but establishing their liability may not justify further expense or hassle.

Jack Harper

4

I am not sure that s49A is the issue here but rather that on Mr P’s death the property did not become settled by virtue of his will because it already was under the 2016 deed. The value of the property would still be deemed to be in his estate under the GROB rules but the property was not.

RNRB can apply to GROB’s but only where the original gift is to a lineal descendant whereas here it was to trustees so in my view no RNRB is available.