Writing for Taxation magazine’s Readers’ Forum, BKL private client tax specialist Terry Jordan answers a query involving the creation of a nil rate band (NRB) discretionary trust by a widow who moved to the UK.
The tax query
‘My client’s husband passed away in Kenya in 1973. All his assets went to his widow then. They were living there, having never been to the UK before.
The widow later moved to the UK. Her estate is approximately £675,000 (a house worth around £650,000 and other assets amounting to £25,000 or so).
She wishes to leave this to her son but, at the same time, wishes to create a nil rate band (NRB) discretionary trust with the £325,000 NRB and two years’ worth of £3,000 exemptions, ie £331,000 to go to the trust. The beneficiaries of this trust will be her children and grandchildren. The remainder £344,000 will go to one of her children. To sum up: a) legacy to the trust £331,000 (being a debt on the house); b) house and other assets to child, subject to the debt of £331,000.
Alternatively, if possible, the intention is to use up £331,000 plus her late husband’s £325,000 NRB (if available) to transfer assets of £656,000 to the trust for asset protection and avoid increasing the children’s estate for IHT going forward.
Can her estate benefit from the late husband’s £325,000 NRB and £175,000 residential NRB? If so, with the total £325,000 x 2 plus the two years’ annual exemptions totalling £6,000, can she move the house to the trust free of IHT and have the remainder left to the children as a £19,000 debt on the house due from the trust?
Readers’ views would be appreciated.’ Query 20,535– Puzzled.
Terry Jordan’s reply: To avoid IHT the £25,000 would need to be covered by the residence band.
‘Puzzled’s client was apparently domiciled in Kenya when she was widowed in 1973 as we are told that neither she nor her husband had been to the UK before and I infer that she is now a long-term resident here such that her worldwide estate is potentially exposed to inheritance tax on her death.
There is no territorial restriction to the transfer of unused nil rate bands and residence nil rate bands under IHTA 1984, s 8A and 8G, so at best the client could have £1m of assets before there would be a positive IHT liability on her demise.
Puzzled refers to two £3,000 annual exemptions. If unused, the exemption under s 19 can be carried forward to the following tax year and used after the current year’s exemption but only in respect of lifetime transfers and not on death, see IHTM 14141.
I confess I am confused by Puzzled’s proposals regarding the trust. On current figures the value of the estate is £25,000 over two ordinary nil rate bands so to avoid IHT on death that amount would need to be covered by the residence band. For it to apply requires a direct descendant to closely inherit part or all of a residence. An immediate post-death interest (IPDI) trust for the son would qualify and would put the value into his IHT ‘estate’.
On the figures it might be more practical to leave what at present would be £25,000 worth of the home to the son with the remainder of the estate being held on discretionary trusts to give some measure of asset protection and avoid aggregation of wealth in the hands of younger generations.’
The full article was published in Taxation magazine (issue 4990) and is available to subscribers here on the Taxation website.
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