Unadministered nil rate band discretionary trust and CGT/TRNRB

The deceased died in 2008 and her will contained a NRBDT. This has not been administered. The estate comprised of a half share (tic) in the property and £20,000 cash and was well within the NRB. I note from a similar previous thread that it is thought that if the property is now sold, the deceased’s half share could be subject to CGT (there is a potential gain of the deceased’s share of £90,000 less the PR’s annual allowance) albeit the husband’s share would qualify for PPR. The suggestion was that the PR (husband) could now appropriate the half share to the trust to constitute the trust and then the trustees could grant a life interest to the husband and then the property could be sold and full PPR claimed. However, in the current case, the husband is now in care and cannot occupy the property. I am assuming, therefore, that this will not work? Wouldn’t this be disadvantageous in any event in claiming the transferable residence nil rate band when the husband dies?

If no action is taken to sell the property/constitute the trust now and the husband then dies, I understand that HMRC would deem the husband’s estate to include a liability (IOU) equivalent to the value of the half share at the date of the first death, plus statutory interest and the transferable residence nil rate band would be available. If that is the case, then does that mean that HMRC would also deem the deceased’s half share in the property to have been assigned to the husband and form part of the husband’s estate for IHT purposes? If that is the case, what would then be the position re: CGT – could full PPR then be claimed if the property is sold after the husband’s death, or would we still have the same problem as above?

Geraldine Craig

When considering a distribution of the estate, it is necessary to look at the values as at the date of distribution - the date of death values are only really relevant so far as IHT is concerned.

The NRB trustees will be entitled to the full value of the NRB as at the date of death (less any deductions provided for within the clause defining the NRB Sum), plus interest (although the amount of interest may be limited to the last 6 years - Limitation Act 1980).

In the absence of the trustees having appointed an IPDI in the deceased’s share of the property to the husband, I do not believe PPR will apply. As there is a discretionary trust I do not believe it would be possible to bring his occupation within s.225A TCGA 1992 either.

Unless the deceased’s estate can now be administered and their interest in the property transferred to the trustees, there will not even be any annual CGT allowance available to offset any charge to that tax.

As the deceased’s beneficial interest in the property remains in their estate, and does not pass into the husband’s estate, I do not see how any IOU could exist, either deemed or in reality.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

  1. I assume no assent was made of W’s half share to H.

  2. If not, W’s half remains vested in W’s executor, but after all this time there is no executor’ cgt allowance.

  3. I assume H took the cash and paid himself the funeral expenses, debts etc. If so, there is due back to W’s estate the net figure, which will be a debt on H’s death.

  4. As things stand, there will be no cgt uplift on H’s death in respect of W’s half of the house, unless its current value exceeds what is due to the Trustees-the nrb (assuming no gifts aggregable) plus interest (unless the trustees waive the interest).

  5. The nrb will be £300,000 or £312,000, depending on when W died in 2008.

  6. If the half share of the house plus interest (unless waived) plus the cash due back from H is still within the nrb applying to the Trust legacy, then all of these are due to the Trustees, so no iht on that share on H’s death, but also no cgt uplift. There would also be no PPR on a sale.

  7. The other issue will be the loss of the RNRB, if H’s share of the house is not enough to cover both the RNRB and the TRNRB. If this is the case, and if there are powers in the Will to do so, consideration could be given to the executor assenting W’s share to H in exchange for an unsecured iou. This could trigger SDLT, although perhaps not if it falls within the SDLT holiday until 31.3. Consideration also needs to be given to s.103 FA 1986. If neither of these are a problem, this would result in W’s half getting the cgt uplift on H’s death (if it is not sold before then), and the RNRB and TRNB. However, if this is done I believe there would be no PPRR for W’s half share. So best simply not to sell, and wait to get the uplift.

  8. There would be a problem if H does not have the mental capacity to deal with this as executor/ debtor under the iou.

  9. The charge scheme (if there are powers in the Will) would work if the executors and trustees are not the same people ( I am not sure this is a problem in reality, but many think it could be so far as hmrc are concerned), but there would be no RNRB in respect of the value of the house up to the amount of the charge, so this may not help. Again, problems if H does not have mental capacity.

As always, the solution is fact/value specific.

NB I have seen Paul’s reply-I do not believe the Limitation Act applies to interest arising under an unpaid legacy

I believe Paul is correct with respect to the “interest” point.
See LA 1980 s. 22(b):

“(b) no action to recover arrears of interest in respect of any legacy, or damages in respect of such arrears, shall be brought after the expiration of six years from the date on which the interest became due”.

Malcolm Finney

  1. correct
  2. and Paul’s reply: temporarily overlooked this point thanks
  3. yes.
    4 & 6. and Paul’s reply: I had thought the amount due to the Trustees was the amount they would have received if the trust had been properly constituted within 2 years, in this case £230,000 (plus interest unless waived) even though the nrb was £312,000 @ the date of death and that the husband’s estate could claim the unused percentage of the wife’s nrb - are the trustees now entitled to the whole £312,000 so there would no longer be any unused percentage? The half share of the house has now increased by £90,000.
    6 & Paul’s reply: noted that the half share remains in wife’s estate and the cash (less liabilities paid by the husband) is treated as a debt in husband’s estate - due to the trust
  4. Are you saying that doing this would result in 100% CGT uplift on the second death and if the property is sold for a gain following the second death only the husband’s share would get PPR?
  5. The daughter has been appointed an attorney under a registered LPAPF - so presumably there would not be any problem in her dealing with the assent/iou on his behalf if he lacks capacity?
    Paul/Malcolm: I note interest is limited to the last 6 years.

Sorry-I should have been more precise.

S. 21(1)(b) of the Limitation Act provides that no limitation period applies for an action to recover trust property from a trustee which is in the possession of the trustee.

The court of appeal decided in Green v Gaul [2006] 1 WLR 591 that this applies equally to PRs.

So, no limitation period applies to the trustees recovering either the assets due to them or interest on it (as interest is part and parcel of the executor’s duty to account)

4&6-The TNRB is calculated using date of death figures-regardless of the actual amount which eventually goes into the NRB trust.

So, if the amount due to the trust was £230,000 at date of death figures, then the balance of the nrb, as a proportion of the value of £312,000 at the date of death, will be available on H’s death based on the nrb on his death.

The amount to go in the nrb trust now depends on the value of the half share now. So, if the balance of the cash due back to the estate is say £12,000, potentially £300,000 plus interest (unless waived), could still be due to the Trust, if the value of the half of the house has increased to £300,000 or more. However, the Trust cannot claim more than the executor should have been holding from the estate, so the sum due including interest will be capped at that figure.

If H is in a care home, there may be an advantage in as much as possible going into the trust now, subject to consideration of the income tax position on any interest paid in. Again, it is fact specific. So if the value is more than £300,000, a share worth that sum would be due to the Trust, if interest was waived.

7.If para 7 is followed, there will be a cgt free uplift on H’s death-but no PPRR will be due AFTER H’s death-but there would be an up to date base cost. Any sale BEFORE H’s death would only attract PPRR on H’s share.

8.If H has lost mental capacity, and there is a registered lpa, I do not believe there is a problem in her signing an iou-this is not a gift.

9.However she cannot sign the assent, as she has no authority to act on his behalf as executor.

You indicated H was the sole executor, and I assume power was not reserved to another person-if it was the answer is different.

10.If he was sole PR, the grant is not revoked. A new grant may be applied for by a person who is equally entitled to take the grant under rule 20 of the Non Contentious Probate Rules 1987 (NCPR), or in the order provided by rule 35(2) or by discretionary order under rule 35(4) of the NCPR. Under rule 35(2)(b), if there is no one appointed by the Court of Protection to take the grant, then a new grant de bonis non may be issued to the attorney of the PR under a registered enduring or lasting power of attorney-I am indebted to Practical Law for this part of the answer!

11.As I said in my second post yesterday, interest in not limited to 6 years.

Regarding Simon’s suggestion in his point 7 then “yes” there would be a 100% CGT uplift on H’s death because at that time he would own 100% of the property.
If following the assent of W’s interest to H (H then owning 100%) H sold the property I can’t see a reason why PPR would not in principle apply to any capital gain arising on the sale. If, however, the property is sold after H’s death (at which time H owned 100%) by his PRs no PPR would apply.

Malcolm Finney

On reflection, I agree with Malcolm-once W’s half share is assented to H, PPRR on the whole should be available on a sale before H’s death.

Would the assent now of W’s share to H, coupled with an IOU by H trigger a CGT liability given the gain in W’s share (I note it could trigger SDLT after 31.3)?

Yes I believe it would, as it is a disposal for tax purposes, and no PPRR.

So if you use the charge scheme no tax disposal but less RNRB. However if you keep the house there is the uplift on H’s death. If interest is waived and some cash is available then perhaps enough of the debt can be repaid in due course to receive the full RNRBs?

Simon Northcott

My understanding of whether any CGT or SDLT charges arise under the IOU/charge schemes very much depend upon the paperwork.

With respect to Geraldine’s last post, whether any CGT arises under the IOU proposal presumably depends upon whether in fact any disposal form CGT purposes has actually arisen.

Is it not arguable that, prima facie, there has not been a disposal by any of the relevant parties unless W simply effects a purchase of the land from the executors. The nature of the transaction is that W is not purchasing any asset but is merely entering into an IOU in favour of the trustees and in return the trustees release rights under the will.

I think it is therefore difficult to be definitive without a detailed look at the paperwork involved.

Malcolm Finney

Malcolm Finney

H is the residuary beneficiary but is only entitled to whatever is left after satisfying the nrb gift.

A transfer of the share subject to a charge in respect of the nrb is an authorised way to satisfy both if power to do so is in the Will.

Therefore the transfer has to be in consideration of the residuary beneficiary providing a way to satisfy the nrb gift. He does so with the IOU.It is a purchase at a price with the price being left unpaid, but an iOU granted instead. Again power to achieve this must be in the Will.

Therefore it is a disposal for value and potentially taxable to sdlt and CGT.

Simon Northcott

I think Simon we are going to have to agree to disagree.

The IOU arrangement drafted appropriately does not give rise to any CGT charge as there is no disposal (or purchase) by any of the parties whether that party be H, PRs or trustees.

Malcolm Finney

In that case why is there an sdlt charge?

Surely H would not sign an iou unless it was in exchange for the transfer of the share of the house?

Happy to have evidence I am wrong!

Simon Northcott

The lack of any SDLT charge arises due to the fact that there is no chargeable consideration.

As per my earlier post “The nature of the transaction is that W is not purchasing any asset but is merely entering into an IOU in favour of the trustees and in return the trustees release rights under the will”. H’s acquisition is qua residuary beneficiary not purchaser.

I suspect Simon we may be operating under different assumptions as to how the debt scheme may be implemented and documented. My views are based on my recollection (suspect though it may be) on how the debt scheme was implemented when I have been involved and tax counsel has prepared the documentation.

An IOU is nothing to the point. Without prejudice to whatever is its precise legal status, in context or in general, is it for SDLT chargeable consideration for a land transaction?

Jack Harper

I am pleased to say I have found a paper by James Kessler confirming that although hmrc take the view (which he has always disagreed with) that the iou is given in consideration of the transfer of the land (so sdlt is due) in practice they do accept CGT is not due, which seems rather inconsistent!

I have never had to address either issue as since hmrc took this stance, when sdlt was introduced, I have used the charge scheme, which also gets round s.103, so is preferable

It is only since the RNRB that the charge scheme has become less attractive

In this case it appears the IOU route is the best, and a view will have to be taken on sdlt, unless it falls within the sdlt holiday period.

Simon Northcott

So how can there be such divergent approaches?

I think it is substance and form.

The form is argued by James Kessler, the iou is given to release the executors from their obligation to pay the nrb trustees.

The substance argued by hmrc is the executors ask the residuary to give the iou to the trustees in consideration of the executors transferring the land.

So, who is right?!

Over to you.

Simon Northcott

My head’s hurting!!

Interesting re James Kessler’s comments. I would back James against HMRC’s views !!

Malcolm Finney