A Nightmare scenario

StevieD54

Well things have taken a rather sinister turn, completely out of the blue. My sister died in 2024, she left everything to her husband and he has now passed away. My sister’s autistic son continues to live in the family home supported by a team of PA’s. Cash assets total around £130k. The property is worth around £240k. Everything will pass into a discretionary trust for the son once probate is sorted. So I know my sister can leave unlimited assets to her spouse with zero IHT payable.

I instructed a solicitor to start probate 6 weeks ago and she has just emailed to tell me RNRB cannot be applied as the property is not being left to a direct descendant. So she says IHT is likely payable as the husband’s estate has inherited @£370k. In practice, the property has been left to the son, it’s just that it’s going into his trust. Perhaps I should tell her to put it in the son’s name? It would then qualify for RNRB surely?

I find it astonishing that the solicitor (a different one) who drafted their ‘mirror’ wills failed to tell them that putting the property into a trust would mean that RNRB or TRNRB is not available.

Thoughts anyone? whilst I recover from the shock?

lincroft1710

You need to discuss this with the solicitor. She is probably correct in that there is no RNRB as the property has been left to a trust. However if your nephew is classed as disabled there may be no IHT to pay, but the government guidance on this is a bit complicated, so I may have read it incorrectly.

The solicitor who drafted the wills would only advise their clients if their wishes were unlawful or likely to cause their wills to be challenged or lead to disputes between beneficiaries. Whatever IHT rules and rates existed at the day of a will being drafted, may not be in place when a will is executed

poseidon1

First point, it is correct that RNRB is lost where property passes into the medium of a discretionary trust ( regardless of status of the beneficiary). However, this maybe considered a reasonable price to pay ( in the present instance ), to preserve the beneficiary's lifetime access to a whole range of means tested benefits.

On the figures quoted, IHT payable likely around £18,000, but this should be measured against all the annual lifetime state benefits lost without the protection of the trust. As regard the tax itself, around 65% of it is attributable to the house, so around £11,700 can be paid over 10 yearly instalments but with interest chargeable on the declining balance.

Second point, there is no IHT exemption for assets entering a discretionary trust for disabled persons on death of the original settlor of a Will Trust.

However such trusts do have valuable ongoing tax benefits not enjoyed by normal discretionary trusts, these are:

1. Exemption from the 10 yearly anniversary IHT 6% charge on trust value exceeding the NRB.
2. Trust income benefits from the disabled person's personal allowance, and income above that enjoys the basic rate tax band. Normal discretionary trusts attract a 45% tax charge on income.
3. Trust capital gains ( if any ) attracts the beneficiary's £3,000 annual exemption. Trusts only get 50% of that allowance.

Assuming both the house and cash are now in the trust, the trust should probably be viewed as a positive in preserving unfettered access to means tested benefits, notwithstanding the IHT bill.

However, you may find administration of the trust a challenge by way of HMRC tax compliance (special rules apply), trust accounting and management of the trust cash by way of future investment given your nephew's age. A tax accountant with specialism in trusts maybe helpful in getting the trust up and running,

In the meantime see links below to HMRC trust registration and tax compliance regime for trusts where the 'vulnerable person election' is made -

https://www.gov.uk/guidance/register-a-trust-as-a-trustee

https://www.gov.uk/trusts-taxes/trusts-for-vulnerable-people

Keep_pedalling

You can’t claim the RNRB but there is the transferable NRB from your sister’s estate giving your BiL’s estate total exemptions of £650k

StevieD54

https://forums.moneysavingexpert.com/discussion/comment/81961409#Comment_81961409

excellent stuff, thanks a lot Poseidon1. I’ll discuss your points raised with the solicitor soon.

poseidon1

https://forums.moneysavingexpert.com/discussion/comment/81961898#Comment_81961898

Have to agree.

Earlier post indicated house was in sister's sole name and she left entire estate to husband so her NRB is indeed available in its entirety. No reason why an IHT402 claim cannot be made even though the estate passes to discretionary trust. Therefore, not at all clear why solicitor seems to have missed this basic relief. Begs the question whether OP should be trusting probate to this particular 'professional'.

In any event with IHT no longer an issue the trust even more beneficial, subject to the complexity of its future administration.

StevieD54

My solicitor phoned me offering apologies yesterday, she had misread the date of death of the husband as January 2025.

Anyway, poseidon and KP, going back to the points you both raise. Yes, my sister left everything to her husband so no IHT can be due. So when his estate is valued, the fact that £650k relief is available is moot, as cash assets will be £130k max. The property is then valued at say £240k, but RNRB cannot be claimed. If the property was being sold and therefore ‘cash’ realised, that would be different, and the £650k figure would be in play. Or am I missing something?

poseidon1

https://forums.moneysavingexpert.com/discussion/comment/81963710#Comment_81963710

The two NRBs now totalling £650k for the husband's estate , applies to the entirety of the estate assets including the house.

Therefore, with a total estate valued at only £370k, the Residential nil rate band ( even had it been available ) would have been entirely surplus to requirements , and we would have reccomended not to bother claiming it ( avoids having to complete IHT 400).

Your primary query to the solicitor therefore, should be how on earth she overlooked the £325k NRB transferable from your sister, and mistakenly ( in our view) come to the conclusion that IHT was payable? It is a fundamental oversight, for which there can be no excuse. Assuming she has no excuse, need to rethink if she is the right person for this task. I would not use her.