Trust income for mother in law in nursing home care

moedeeb

My 89 year old MIL is in a self funding nursing home with severe dementia. The family home is held in a Nill Rate Trust established in my late Father in Law’s will. We are partly funding care via short letting (Air b&b) and this year will be the first where MIL has received income from the trust.

I already have access to her Gov tax account via “someone to help you” option but will we need to contact HMRC and establish POA position and then fill in a Tax return on her behalf?

Also any tips for minimising tax on the approx £25K income this tax year as I am new to AB&B and it all seems a bit complex re capital write down/ expenses etc.

Keep_pedalling

Do you actually have POA for MIL? If not it sounds like you need deputyship.

Is the whole house in trust or is she a joint owner? 

poseidon1

moedeeb said:

My 89 year old MIL is in a self funding nursing home with severe dementia. The family home is held in a Nill Rate Trust established in my late Father in Law’s will. We are partly funding care via short letting (Air b&b) and this year will be the first where MIL has received income from the trust.

I already have access to her Gov tax account via “someone to help you” option but will we need to contact HMRC and establish POA position and then fill in a Tax return on her behalf?

Also any tips for minimising tax on the approx £25K income this tax year as I am new to AB&B and it all seems a bit complex re capital write down/ expenses etc.

Seems to me you have little conception of trust tax reporting - see link below

https://www.gov.uk/trusts-taxes/trustees-tax-responsibilities

If the entire house is in the trust , then the entire income is taxable as trust income culminating in the production of a trust tax deduction certificate required in determining  the net trust income reportable on  MIL's behalf. In this regard the trustees' tax reporting responsibilities are separate and distinct from whomever holds a POA on MIL's behalf. 

If only half the house in trust, then it maybe possible to get HMRC to agree that in essence the trust income has effectively been 'mandated' direct to MIL and therefore reportable by her  in its entirety together with her personal half share of the rent from the house.

I suspect it will be too much of a steep learning curve for you to work out the nuances of tax reporting for the Air b&b as well as the trustees' tax compliance and accounting responsibilities.

 Suggest you enlist the services of a Chartered Accountancy firm who can handle both aspects, especially since the tax treatment of Holiday lets will align with standard AST tenancies in April .  Professional accountancy fees will largely be tax deductible  from the trust income and your MIL's share of property income ( if she retains half ownership).

Frankly what you are now having to deal with is too complicated for mere ' helpful tips ' from this forum,  targeted professional advice and assistance is necessary .

Hopefully this trust has met the deadline for registration on the HMRC trust register, since  if not the trustees may have already triggered a penalty for non compliance - see link below

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

poseidon1

Incidentally, in a previous thread in July last year, you indicated your MIL bought the cottage in 1986 for £40k. Forum contributors then spent time explaining the CGT implications of a future  sale on her behalf.

You now state the property was  gifted into a NRB trust for MIL  by her late husband. Clearly a  fundamental contradiction here, since if what you now state is the correct position, then despite their best endeavours all previous forum contributors  thoughts on the CGT outcome of a future sale are incorrect .

For the record, if the entirety of the property was gifted into a NRB trust by FIL, the base cost will be uplifted to  market value at date of FIL's death and apportionment of future gains  as it relates to  main residence  relief will be by reference to that date of death.

 Needless to say, any CGT exposure will fall on the trust ( not MIL personally) with only a limited trustees ' CGT exemption available ( currently £1,500).

As previously advised professional advice really is needed here.

moedeeb

Thank you all for useful comments. I agree that we are in a complicated situation and i will seek further advice. However we can’t be alone in having a parent die with a nil rate trust set up as part of their will. Neither my wife or her sister who were both executor’s of the FIL will can remember any discussion of their responsibilities related to the trust with the solicitor who sorted the will and probate etc. There is no record of the trust ever being registered at the time or subsequently. 

I wonder if the first thing to do is go back to the solicitor practice which still exists and try and establish why nothing was done at the time. 

My FIL died in 2009 when property was probably worth around £350K the nil rate band was £320K and no other assets were transferred to the trust so I assume that 90% of the property now worth about £600k is in the trust. 

I know I may seem clueless but am I correct that the trust is a separate legal entity which  should have its own tax account with HMRC?

The remaining trustees have a duty to complete tax records and discretion as to where the profits if any are distributed (100% to MIL) . These profits then need to be declared in MIL’s tax return.  (How do we avoid double taxation?)

If we were to simply sell the property and pay CGT from date of FIL death to disposal the trustees could pay from the trust a monthly amount to make up her care fees until her death. 

Residual funds would then belong to remaining beneficiaries with no  further immediate HRT liability.

We will seek proper advice in next few weeks.

Sarahspangles

This post might get more replies on Deaths, Funerals and Probate, if you ask for it to be moved by using the ‘Report’ button. Two respected posters who frequent that group have commented on this thread, but it’s possible you will get other people’s war stories about Trusts.

I don’t think you’re going to get chapter and verse from any forum about what you should have/should be doing at this point, without consulting a solicitor. If you don’t have Power of Attorney you possibly shouldn’t be doing anything so that’s the first thing to establish.

Keep_pedalling

moedeeb said:

Thank you all for useful comments. I agree that we are in a complicated situation and i will seek further advice. However we can’t be alone in having a parent die with a nil rate trust set up as part of their will. Neither my wife or her sister who were both executor’s of the FIL will can remember any discussion of their responsibilities related to the trust with the solicitor who sorted the will and probate etc. There is no record of the trust ever being registered at the time or subsequently. 

I wonder if the first thing to do is go back to the solicitor practice which still exists and try and establish why nothing was done at the time. 

My FIL died in 2009 when property was probably worth around £350K the nil rate band was £320K and no other assets were transferred to the trust so I assume that 90% of the property now worth about £600k is in the trust. 

I know I may seem clueless but am I correct that the trust is a separate legal entity which  should have its own tax account with HMRC?

The remaining trustees have a duty to complete tax records and discretion as to where the profits if any are distributed (100% to MIL) . These profits then need to be declared in MIL’s tax return.  (How do we avoid double taxation?)

If we were to simply sell the property and pay CGT from date of FIL death to disposal the trustees could pay from the trust a monthly amount to make up her care fees until her death. 

Residual funds would then belong to remaining beneficiaries with no  further immediate HRT liability.

We will seek proper advice in next few weeks.

NRB trusts are not that common as they pretty much become obsolete back in 1975 when unlimited spousal exemption was introduced, so you will struggle to find others in this situation. 

poseidon1

moedeeb said:

Thank you all for useful comments. I agree that we are in a complicated situation and i will seek further advice. However we can’t be alone in having a parent die with a nil rate trust set up as part of their will. Neither my wife or her sister who were both executor’s of the FIL will can remember any discussion of their responsibilities related to the trust with the solicitor who sorted the will and probate etc. There is no record of the trust ever being registered at the time or subsequently. 

I wonder if the first thing to do is go back to the solicitor practice which still exists and try and establish why nothing was done at the time. 

My FIL died in 2009 when property was probably worth around £350K the nil rate band was £320K and no other assets were transferred to the trust so I assume that 90% of the property now worth about £600k is in the trust. 

I know I may seem clueless but am I correct that the trust is a separate legal entity which  should have its own tax account with HMRC?

The remaining trustees have a duty to complete tax records and discretion as to where the profits if any are distributed (100% to MIL) . These profits then need to be declared in MIL’s tax return.  (How do we avoid double taxation?)

If we were to simply sell the property and pay CGT from date of FIL death to disposal the trustees could pay from the trust a monthly amount to make up her care fees until her death. 

Residual funds would then belong to remaining beneficiaries with no  further immediate HRT liability.

We will seek proper advice in next few weeks.

It is my distinct impression from other posts to this forum, that the typical high street solicitor give little or no guidance to either the original client or the subsequent trustees ( on the client's death ) of what is entailed in the administration and management of these trusts for surviving spouses.

In many situations where the surviving spouse happily occupies the trust property until they die, there is in fact very little administration involved other than registration of the trust with HMRC,  and maybe a Form A restriction on title at the Land Registry. However the HMRC trust register was a relatively new construct introduced in 2017.

You can be forgiven for having  been wholly unaware of that new requirement, I suspect at the time it was introduced HMRC were labouring under the  gross misconception that all trustees were professionally advised ( on an ongoing basis) and would come to hear of the requirement via their professional advisers. The reality of course is that these trusts of the marital home rarely have any (competent) professionals keeping a watchful eye on compliance issues or providing guidance.

Where the surviving spouse can no longer occupy the home, and the trust provisions require income be generated on their behalf from the trust asset, that's where these trusts can become 'loaded guns' in the hands of the untutored trustee. Some ( as in your case) will merrily proceed as if the trust does not exsist thereby defeating the original intention of the creator of the trust as well as triggering a real muddle of personal/trust  tax issues.

Going forward,  and as advised you are urgently in need of professional guidance and help on the twin issues of Air b&b taxation as it relates to the income tax payable by the trustees and how that taxed income then feeds through to your MIL's personal tax reporting ( there is no double taxation involved! ).

I note you intend to go back to the solicitor to  ask why there was no advanced guidance given to the trustees on their future duties. However as regards the immediate tasks in hand, the most appropriate professional to consult is  a firm of  Chartered Accountants with a trust department as well as a personal tax division. The work you have ahead of you is the specific skillset of Accountants, not Solicitors.

Incidentally you mention the possibility of selling the property and drawing down the capital to fund care home fees. You would need to determine if the will trust document has specific powers over trust capital that permit this in favour of the widow. Perhaps the solicitor maybe of use on that question.

moedeeb

Thanks to everyone who has helped me through this. I have spoken to a specialist accountant and started the ball rolling. Basically they will register the trust, sort trust tax return and then the MIL tax return. I feel better after speaking to someone and much less daunted by the whole process. 

poseidon1

moedeeb said:

Thanks to everyone who has helped me through this. I have spoken to a specialist accountant and started the ball rolling. Basically they will register the trust, sort trust tax return and then the MIL tax return. I feel better after speaking to someone and much less daunted by the whole process. 

Excellent news!

moedeeb

Update. I am still progressing this with my accountant but just wondered if anyone can give a view on the proportion of the property actually owned by the trust. I am assuming it is 50% due to the changes to registered ownership when the will was written.  However the nill rate band on death of FIL was £320k and all other assets went directly to MIL.  Home value was about £320 K at time of death so is there any chance the trust could own 100% of house? .  This would simplify tax as the trust return assumes 100% of profits and pays 40% tax  MIL declares trust income and gets tax refund based on her personal income position.