I am dealing with a will dated 2011 which has a NRB discretionary trust. When the person died in 2014, there was no IHT return or probate and nothing was done to constitute the trust. Her husband simply took over her estate as the residuary heir and the NRB trust was ignored. HMRC’s internal manual IHTM43016 addresses unconstituted Nil Rate Band trusts but does not give much guidance. In the absence of a deed of variation to nullify the NRB trust within 2 years of death, is there any way that the transferable NRB can be preserved or the amount treated as a debt in the husband’s estate without any relevant documentation having been put in place?
The guarded IHTM guidance should not be interpreted as HMRC having up their sleeves a get out of gaol card, contrary to their justifiably legendary Olympic lack of empathy.
A lawyer’s answer must be that unless the Will or the trust it creates are legally invalid or can be rectified to excise the trust it has to be constituted by appropriation or equitable charge or by creating a debt. But as you say, it will reduce TNRB.
You do not say how or why cashing in the NRB on the first death will be disadvantageous; we seem to face a longish period before it will rise above £325k. While it is not increased it would only have had the effect of lopping that amount off the second death estate.
A DT with a charge or debt will never suffer TYA or exit charges, though that may be a problem eventually with an appropriation, if the deceased had a nil cumulation so the trust has a full NRB. An appropriation of part of the main residence will be fine for CGT but not IHT if its value increases over time, although it will have a valuation discount of 15% if occupied by someone and 10% if not. It will also reduce the future value of any QRI in the other estate. Of course the full TRNRB will be available as presumably RNRB was not used on the first death.
The DT will have to be registered on TRS but its flexibility and non-aggregation with any beneficiary’s free estate may prove positively helpful.
Jack Harper
I have had similar where on the second death we explained to HMRC that the trust has not been constituted, all assets were transferred to the surviving spouse who treated then as their own and now form part of the second estate. Claimed TRNB on the basis that there was no legacy on the first death which took effect. HMRC accepted with no queries. A pragmatic if technically questionable solution.
HMRC practice does not necessarily make good law.
Does HMRC ask to see the will of the first to die, to be satisfied that there was even power to give the surviving spouse the NRB legacy?
Even though probate might not be obtained, as a will speaks from death the executors/trustees named in the will may well be personally liable to any disappointed beneficiary of the NRB should a claim be made that allowing the surviving spouse to “take all” was a breach of trust for some reason (and there may be many such reasons).
With modern “merged” families there may be greater potential if the beneficiaries include, say, the children of the deceased’s first marriage.
“Practicality” for HMRC does not bind everyone else.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
Once again a fascinating insight via a forum member’s direct practical encounter. Chapeau, Rachel.
I conjecture that HMRC will have ascertained no significant loss of tax in adopting their position and may have been strongly influenced by there being no avoided tax liabilities under the counterfactual route of constituted trust plus exhaustive appointment to surviving spouse.
It certainly implies that a practitioner faced with the issue should proposition them on the “don’t ask don’t get” principle.
A word of caution: a nolle prosequi by HMRC for tax does not efface the theoretical rights of action of beneficiaries disappointed by the trustees not constituting and fully distributing.
Jack Harper
All excellent points. I should have clarified that in my case the family position was very clear and the beneficial entitlements totally aligned.
If the estate was “administered” quickly and the executor(s) actively transferred assets to the widower, that might be treated as an exercise of any power to advance the NRB trust fund to the widower as beneficiary - applying s.144 and thereby retaining the TNRB.
That’s obviously fact specific (in particular it helps if widower is sole executor/trustee, and they must have the relevant power). It’s not a comfortable position if the family/beneficiaries aren’t all aligned.
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