NIL-RATE BAND DISCRETIONARY TRUSTS
What’s a Discretionary Trust?
A discretionary trust is one where the trustees may exercise discretion (hence the name ‘discretionary trust’) apropos how to distribute not only the income generated by the trust’s assets but, ultimately, the assets themselves. That seems easy enough to understand. Enjoy it. Because it may be the last thing on this page that makes sense.
What’s a Nil-Rate Band Discretionary Trust?
Nil-rate band discretionary trusts are used by estate-planners to reduce liabilities to pay inheritance tax on the death of surviving joint proprietors.
They’re usually appropriate if residential property prices exceed the inheritance tax threshold. And they can avoid the need to sell family homes.
Nil-rate band discretionary trusts can protect assets intended for specific beneficiaries, such as children from earlier marriages, if the survivor remarries.
They also protect assets otherwise liable to means-testing if survivors need long-term care, or are at-risk if survivors encounter financial difficulties.
Can the Man-on-the-Street Create a Nil-Rate Band Discretionary Trust?
There are lots of opportunities for DIY law. But Nil-Rate Band Discretionary Trusts are not amongst them. Lay down and avoid them. Better still, get a proper solicitor like somebody from Goodwills. Because, although Nil-Rate Band Discretionary Trusts are a great opportunity to duck some inheritance tax, are mind-bendingly difficult to comprehend.
How Does a Nil-Rate Band Discretionary Trust Work? It’s Complex. It is Beyond Complex. But We’ll Try to Explain
There are 2 routes. The trust can be:
- Created before the 1st joint proprietor dies
- Created after the 1st joint proprietor dies (but everybody pretends it’s actually created before the 1st joint proprietor dies).
Let’s look at these 2 processes and see if we can pin down how each operates.
The Process if it’s created before the 1st Joint Proprietor Dies
- If significant property destined for the trust isn’t already held as ‘tenancy in common’ then the proprietors sever their joint tenancy
- Spouses / civil partners make wills leaving bequests equal to the value of an individual’s inheritance tax exemption (the ‘nil-rate band’)
- On the 1st partner’s death that would not go to the surviving partner but to the trust
- It is actually then held for discretionary beneficiaries such as surviving partners, children and grandchildren
- Often surviving partners benefit by receiving discretionary payments or loans from the trust
- When surviving partners die property held under the trust doesn’t class as part of their estate
- The surviving partners’ beneficiaries avoid the inheritance tax normally payable on property values.
The Process if it’s created after the 1st Joint Proprietor Dies
- After that 1st death the surviving partner and their family create a ‘deed of family arrangement’
- They need to do it within 2 years of that 1st death
- The deed ‘varies the disposition’ of the property in the deceased’s estate that has already taken place at the time of the death
- In effect history is rewritten so the scheme is put in place as if the trust had been created before the death of the 1st joint proprietor
- Under section 142 of the Inheritance Tax Act 1984 everybody acts as if this were the case
- This permits the legal avoidance of inheritance tax savings.
If All of That Seemed Simple
If all of the above seemed to be simple, then there’s more. Because there are a whole series of complications which start with the admittance by the British Government that nil-rate band discretionary trusts are a legitimate manipulation of tax law but they can contravene property law and create problems with the land registry. See www.gov.uk/government/publications/nil-rate-band-discretionary-trusts/practice-guide-70-nil-rate-band-discretionary-trusts#five-severance
A Wonderful Insight into HMRC’s Sense of Humour
If anyone doubts the value of able solicitors like those at Goodwills they should read this wonderful piece on HM Government’s website at www.gov.uk/government/publications/nil-rate-band-discretionary-trusts/practice-guide-70-nil-rate-band-discretionary-trusts#five-severance where they write, with no hint of irony:
‘Confusion results because:
- practitioners confuse B’s capacities. B at this point is holding the legal estate in the land as sole trustee. B is holding their own equitable interest absolutely. B is also A’s personal representative holding A’s equitable interest under the will trust. B can do some things in one capacity and some things in another. What B cannot do, if a Form A restriction has been entered in the proprietorship register, is charge the legal estate if capital money arises (because B is still sole trustee of the land trust)
- B can, if empowered to do so by the terms of the trust, charge the beneficial share they are holding as personal representative. This is a charge of an equitable interest. It cannot be registered. It cannot be noted in the register. It is of no interest to HM Land Registry except to the extent that its existence means that the legal estate is held under a trust of land that warrants the entry of a Form A restriction if one is not already registered
- If B, as personal representative of A, assents to the share, this assent is of no interest to HM Land Registry. It is not of the legal estate. It cannot be registered or noted. However if the share is assented to B and, as a result, B becomes entitled to all of the beneficial interest under the land trust free from any encumbrances created by A prior to death or by B, B can apply to cancel any Form A restriction as there are no beneficial interests and B is entitled to the legal estate absolutely. B may also apply to withdraw any restrictions in Form B or along the lines of Form N, as the trust has ended
- If B, as personal representative of A, charges the beneficial interest held in A’s estate and then assents to the share, again this assent is of no interest to HM Land Registry. It is not of the legal estate. It cannot be registered or noted. However, in this case the trust has not ended because as long as the encumbrance exists on the share, there is a trust of land. There has been no unencumbered unity of beneficial interests with the legal estate. B cannot apply to cancel any Form A restriction’
Where Can You Find Out More about Nil-Rate Band Discretionary Trusts?
You can find out more on nil-rate band discretionary trusts at Goodwills though the HMRC website will tell you a lot at www.gov.uk/government/publications/nil-rate-band-discretionary-trusts/practice-guide-70-nil-rate-band-discretionary-trusts#trust-death. All in all, you’d surely be better off if you just hire Goodwills.