Discretionary Trust and the new rules

clueless137

Hello

My dad died in 2007 when was 20 and at the time there was no transfer of nil rate band to my mother. So she took the decision to set up a trust to utilise my dad's allowance with herself my brother and I as trustees.

We are wondering if it is possible to null the trust and still be able to transfer my dad's allowance over to my mum (or has the set up of the trust effectively 'used' up the allowance already?)

I understand the use of a trust with regards to care costs etc in future but want to know if we can dissolve the trust anyway and transfer my dad's allowance still.

Thank you

macca1974

You won't be able to do that unfortunately. The trust is in itself a legal entity and when probate was finalised, the money / assets will have gone into the trust and stayed there for the last 10 years. The % of the nil rate band at the time that was used up has been used up and can't be changed now. If there was any left in 2007, that can still be used.

To be fair though if it was after April in 2007 that your Father died then the Nil Rate band would have been £300K rather than the current NRB of £325K, so if he used it all up, you won't have lost out on much and also any growth that would have been seen in the assets in the trust since then will have been outside of any estate for IHT (although there would be tax within the trust depending on how its set up). You are looking at a potential "loss" in IHT of about £10K, which whilst annoying, isn't massive in the grand scheme of things if your parents have enough money to be worrying about IHT planning. And to be fair, far less than the likely cost of Care if the money did come back into your Mothers estate.

I vaguely remember from a few years back, that often Nil Rate Band trusts could be set up to make loans to the surviving spouse which then were repayable on death which in turn could reduce the surviving spouses estate. That always seemed like quite a good idea to me. Might be worth consulting a trust expert or IFA to see if things as they are are being done in the most tax efficient way.

securityguy

"I vaguely remember from a few years back, that often Nil Rate Band trusts could be set up to make loans to the surviving spouse which then were repayable on death which in turn could reduce the surviving spouses estate."

And if the spouse dies without the money to repay the loan, the trust still owes the money to the ultimate beneficiaries. I wouldn't fancy being a trustee in that situation: personally liable to other beneficiaries.

getmore4less

you also have to account for any life interests the rules for those changed during 2006-2008

clueless137

Thank you very much for the replies, they are very useful. My mother will be slightly out of IH tax band with her own eventual £500k allowance by 2020 so we are debating whether to keep it or not. But obviously if house prices increase etc then she will eventually go past this. Such a complicated matter, I didn't want to deal with any of this when I was 20, hate dealing with this now too!

Again, thank you all! Much appreciated information.

Keep_pedalling

clueless137 wrote: »

Thank you very much for the replies, they are very useful. My mother will be slightly out of IH tax band with her own eventual £500k allowance by 2020 so we are debating whether to keep it or not. But obviously if house prices increase etc then she will eventually go past this. Such a complicated matter, I didn't want to deal with any of this when I was 20, hate dealing with this now too!

Again, thank you all! Much appreciated information.

I am pretty sure her estate will also be able to claim the residential nil rate band from you late father as well, which gives a current combined nil rate of £525k.