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