Nil rate band discretionary trust - tax due after death?

Blue12_2

My father set up a nil rate band discretionary trust to mitigate IHT. He died in 2003 and since then zero tax returns have been submitted by the solicitors each year on behalf of my mother, who was the trustee. She died a few months ago, and I am now winding up her estate with the assistance of a solicitor. However, the solicitor does not know how to account for the nil rate band discretionary trust, and I really don't understand it at all. All I know about the trust is that my brother and I are now the trustees and the beneficiaries. The trust was originally about £199,000, my father's share of the estate at the time he died. In the IHT forms submitted when my mother died the trust value has been increased to £255,000, because the estate has increased in value I assume.

The solicitor thinks I should consult an accountant. The accountant I asked said that this area of Trusts and Estates and tax owed is usually dealt with by a solicitor. I would prefer not to pay an additional set of fees for a Tax Consultant if it isn't necessary, surely it must be a common-place problem to wind up a nil rate band discretionary trust? Do I or the estate have to pay income tax or capital gains tax on the amount by which the Trust has increased? What are the tax allowances? Should I approach HMRC and ask for their help?

This is the very first time I have posted on a forum, so apologies if I don't get it quite right!

xylophone

http://www.is4profit.com/is4money/tax/discretionary-trust-wills-inheritance-tax.html
http://www.hmrc.gov.uk/manuals/sdltmanual/sdltm04045.htm
http://www.hmrc.gov.uk/inheritancetax/pass-money-property/intro-iht-plannning.htm

You are employing a solicitor to assist you (are you the executor?) in winding up the estate - it seems to me that he should be finding the answers to the questions.

What assets were in the Trust? Was there a "zero" return because the only asset was a property which has benefited from capital appreciation, or an interest free but index linked loan, or shares/funds that paid no income? Otherwise, some form of income has been received? If this was the case, was a "zero" return appropriate?

Blue12_2

I am an executor, together with my brother. I don't know what is in the trust, I haven't yet been able to find the original documents. I don't think it was property or shares, just a proportion of the estate.

Mikeyorks

Blue12 wrote: »

I don't think it was property or shares, just a proportion of the estate.

If (from your original) :

The trust was originally about £199,000, my father's share of the estate at the time

..... it was his share of the estate then surely it includes 50% of the marital property at the time? Were they tenants in common?

xylophone

.... it was his share of the estate then surely it includes 50% of the marital property at the time? Were they tenants in common?

It might not have been necessary to put his share of the marital home into the Trust depending on how much money/other assets were in the estate.

In a Trust with which I am familiar, cash was in the Trust and initially used to buy shares/funds etc which yielded an income. Naturally the Trust tax return had to report this. These were subsequently sold and the proceeds used to make an interest-free loan to a beneficiary.

Once the Trust had no income, HMRC advised that no return would be required until it did.

xylophone

OP - you say that the solicitors were submitting the Trust tax return - surely they have copies of the Trust Deed? If they have reported zero income/gains, how can they know this to be the case?
If there is cash, where is it held? If there are shares, where is the documentation evidencing ownership?
Is there a Trust bank account?

John_Pierpoint

Interesting forum topic.
My DW is in a similar situation and I too am concerned that the situation is not being handled correctly (from the point of view of HMRC)
but I am endeavouring not to poke my nose into what is going on.

I would be interested in how this works out.

SeniorSam

Hi Blue12,

The Discretionary Trust would have automatically been created on your fathers death in 2003. At that time, the assets of the Trust would have been decided by the Trustees and it would depend upon what was allocated or invested into the Trust and how.

If an actual amount of capital were invested, usually into a Bond, using life funds so that there would not be a tax issue for the Trustees to bother with, then any growth in that investment was within the Trust and not accountable to the Tax office.

Usually and possibly in this case, the Discretionary beneficiaries would have included your Mother and the ultimate beneficiaries. Following your Mothers death, then the distribution of the Trust could take place IF THAT IS WHAT IS WANTED.

The reason I highlight that part is because the beneficiaries inheriting would bring the inheritance into their own estates, which could be avoided if required.

It is also possible to add beneficiaries, such as the beneficiaries children, or others.

It is also possible to continue the Trust for a maximum of 80 years from 2003, when it was created, if it has advantages of not being passed on at this time. Many trusts are created so that families can continue to have assets in Trust, from which the Trustees can make periodic loans to 'whoever' and in this way, the advantages could be growth without taxation, loans to the original beneficiaries or their children, or whoever.

Those loans, being repayable to the Trust may have the advantage of not increasing estates which would be taxed, but remaining as a debt to the Trust to reduce the estates of others.

It's very difficult to clarify all the benefits that could be available in Trust, but you do need to speak with someone who know what they are talking about and knows how these Trust can work.

I would suggest that if there was an investment into Trust, you speak with the company who has the investment and the persons who are Trust experts. Just don't jump too quickly without all the information as the Trustees may be disadvantaging the beneficiaries and could be held liable.

Do ask if you want more info.

Sam

Sorry, I overlooked part of your questions.

The £255,000 was the nil rate band allowance from April 2003 and would have been the figure used. It would seem that your fathers estate was valued at £199,000 at the time of his death.

There was no need to have submitted any tax returns when the Discretionary Trust had no income, so I do hope that you have not been paying for a service that was not necessary. If you have been paying for this, then something is very wrong and should be looked into.

There will be no taxes for you to pay on this estate

Hope all this helps

Sam

SeniorSam

xylophone wrote: »

It might not have been necessary to put his share of the marital home into the Trust depending on how much money/other assets were in the estate.

In a Trust with which I am familiar, cash was in the Trust and initially used to buy shares/funds etc which yielded an income. Naturally the Trust tax return had to report this. These were subsequently sold and the proceeds used to make an interest-free loan to a beneficiary.

Once the Trust had no income, HMRC advised that no return would be required until it did.

Xylophone,

you say you are familiar with Trust investments, but investments in shares or other income producing assets will create a tax liability for the Trust.

This is so easily avoided with 'non income producing assets' which would avoid the need to create tax returns each year for the Trust, which are costly and non essential if other investments are considered when the Trust is being created.

Sam

YesWillMan

The way a number of Nil rate band discretionary trusts worked (this was one of the ways of selling them too) was by using the loan facility by the Trust giving an interest free loan to the widow of the amount involved in exchange for the assets that make up that amount. This was usually the property value but it could be other assets as well.

This loan is repayable on her death to the estate of Mr. whose estate is then distributed to the Discretionary Trust beneficiaries under his will, once any tax implications are dealt with.

The advantages of this are that the Loan being interest free does not produce income so that each Tax year it is a "Nil" income tax return for the Trust. Being a loan of course means that it reduces the free estate of the widow by the amount of the loan.

It could be that this is the situation in the OP's case.

The Solicitor dealing with the estate not realising this just shows just how useless some offices are when dealing with something out of the ordinary. When working at different offices it ceases to amaze me how little such Solicitors know about these type of trusts or the workings of Section 16-18 Finance act with regard to additional rate tax, amongst other things.

SeniorSam

It is an unfortunate fact that many solicitors and Will writers know how simple it is to draw up a Discretionary Will Trust and the basics of how it works. When the eventual time comes to deal with the Trust following death, they often don't have a clue.

It is then left to others to clarify the very extensive benefits that are within the Trust wording (assuming it has been drawn up correctly) and help the Trustees to understand their options.

I have experience of meetings with clients and solicitors when the solicitor has asked me how he should proceed. What a world we live in!

Sam