Bank Account for Discretionary Trust

roadweary

Hi,

Our father passed away 7 years ago and the will arranged for his half of the family home to be protected by a Discretionary Trust.  Our mother, after an extended hospital stay is now in a nursing home.

We need to sell the house to fund the home fees.

On sale, half of the home will go into a Discretionary Trust.  We'd like the funds to get into a Bank Account that we know and trust.  And if it might generate any interest (again to pay care home fees) that would be a bonus.

Are there any suggestions / lists anywhere.

Next thing is, for the money to be protected, you'd need a different bank for each 85k, which means we'd need to find more than one bank for the Trust's funds.

Where to start?

Thanks,
R

Keep_pedalling

Are you 100% sure this is a discresionary trust rather than immediate post death interest trust which would be the normal trust to use in these circumstances?

Trust accounts usually pay little interest, but one option is to use NS&I to get protection on the whole same without the need to use multiple trust accounts.

roadweary

I believe so.

The document is called "First Deed of Appointment.  In relation to the Nil Band Discretionary Trust of the will of xxxx yyyyy"

And I've snipped the relevant clause in the pic.

Keep_pedalling

I thought it worth checking, but it looks like it was quite an old will written in the days before the transferable NRB was brought in making these sort of trusts mainly obsolete. 

The tax treatment of these trusts is somewhat more complex than would be the case with a IPDI trust so you may need to take professional advice on that. 

roadweary

Keep_pedalling said:

I thought it worth checking, but it looks like it was quite an old will written in the days before the transferable NRB was brought in making these sort of trusts mainly obsolete. 

The tax treatment of these trusts is somewhat more complex than would be the case with a IPDI trust so you may need to take professional advice on that. 

Hi, appreciated and yes, the will is over 20 years old.  The of appointment is nearly 6 years old.  We've taken both legal advice and tax advice and are advised that everything as it should be.  So it seems it's just a matter now of selecting an appropriate account(s) for the discretionary trust.

bobster2

Not many banks / building societies offer such accounts - try Skipton BS, Metrobank, Bath BS or Cater Allen

poseidon1

roadweary said:

I believe so.

The document is called "First Deed of Appointment.  In relation to the Nil Band Discretionary Trust of the will of xxxx yyyyy"

And I've snipped the relevant clause in the pic.

Oh dear,  an old school nil rate band discretionary trust.

To answer your intial question all the mainstream high street banks have long since abandoned providing trustee banking services, so you are pretty much stuck with the secondary banking/building society sector.

Cater allen offers competive rates, but requires introduction from an intermediary. Metro Bank is also a player.

You indicate you have had tax advice so none of the following  should be a surprise.

If under the terms of the trust income is payable at trustees discretion, then any bank interest received is taxable at 40% ( although potentially partly or wholly recoverable if mother is basic rate or non tax payer). To be noted however that the trust can be altered to grant mother an ' interest in possession ' or life interest, which brings income tax down to 20% and  may escape trustees having to submit annual trust income tax returns if the interest is mandated direct to mother's account.

The other issue is IHT. The trust has exposure to IHT on each of its 10th anniversary if its value exceeds the Nil rate band at that time. In a past post you indicated the property might sell for £500k to £600k. If it achieved top end, then trust only valued at around £300k so no actual IHT at its next IHT 10th anniversary , but still required to submit trustees' form IHT 100 to confirm no tax due since this is more then 85% of the NRB ( the de minimis limit).

Incidentally you are also aware the trust has disallowed the availability of your father's transferable residence nil rate band when your mother eventually passes?

Finally I would mention the trust has for some years had an obligation to register on HMRC's trust register, with penalties for non compliance so hopefully that was dealt with accordingly - see link below

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

roadweary

poseidon1 said:

roadweary said:

I believe so.

The document is called "First Deed of Appointment.  In relation to the Nil Band Discretionary Trust of the will of xxxx yyyyy"

And I've snipped the relevant clause in the pic.

Oh dear,  an old school nil rate band discretionary trust.

To answer your intial question all the mainstream high street banks have long since abandoned providing trustee banking services, so you are pretty much stuck with the secondary banking/building society sector.

Cater allen offers competive rates, but requires introduction from an intermediary. Metro Bank is also a player.

You indicate you have had tax advice so none of the following  should be a surprise.

If under the terms of the trust income is payable at trustees discretion, then any bank interest received is taxable at 40% ( although potentially partly or wholly recoverable if mother is basic rate or non tax payer). To be noted however that the trust can be altered to grant mother an ' interest in possession ' or life interest, which brings income tax down to 20% and  may escape trustees having to submit annual trust income tax returns if the interest is mandated direct to mother's account.

The other issue is IHT. The trust has exposure to IHT on each of its 10th anniversary if its value exceeds the Nil rate band at that time. In a past post you indicated the property might sell for £500k to £600k. If it achieved top end, then trust only valued at around £300k so no actual IHT at its next IHT 10th anniversary , but still required to submit trustees' form IHT 100 to confirm no tax due since this is more then 85% of the NRB ( the de minimis limit).

Incidentally you are also aware the trust has disallowed the availability of your father's transferable residence nil rate band when your mother eventually passes?

Finally I would mention the trust has for some years had an obligation to register on HMRC's trust register, with penalties for non compliance so hopefully that was dealt with accordingly - see link below

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

Hi, my brother took advice and I have read the report, but I can't confidently say I understand everything.

I am most concerned about what you say about the trust disallowing our father's transferable residence nil rate band when mother eventually passes?

Does this mean that the ~300k in the Trust Account would attract inheritance tax?

Our mother does have a life interest, but you'll see 45 not 40% tax is mentioned.

Excerpts from the report:

The property is legally owned by <mother> and her three children, but the beneficial interest is divided so that <mother> has one half absolutely, and the other half is held on trust for <mother> for her lifetime (a life interest trust), with the remainder to the children after her death.

Advice: The current arrangements are legally correct and are generally considered effective for both inheritance tax (IHT) and care fee protection. 

Current IHT Position: <mother>’s estate (house and premium bonds) is within the combined nil rate band and residence nil rate band allowances, especially with the transferable allowances from <father>. This gives a combined IHT exemption of up to £1,000,000, so unless the estate exceeds this, there should be no IHT on her death.
Advice: No further action is needed for IHT minimisation unless the estate value increases significantly. The current structure is effective for IHT purposes.

Trust income taxed at 45% rate, but distribution options available to lower-rate taxpayers among beneficiaries.

NorthYorkie

So it is not a discretionary trust. It started out as one initially but the Deed of Appointment changed this into an Interest in Possession trust with your mother as Life Tenant. 
Despite what the 'report' says the trustees of an Interest in Possession Trust pay income tax at 20% on interest.
I think you need to speak to your advisers again.
 

poseidon1

roadweary said:

poseidon1 said:

roadweary said:

I believe so.

The document is called "First Deed of Appointment.  In relation to the Nil Band Discretionary Trust of the will of xxxx yyyyy"

And I've snipped the relevant clause in the pic.

Oh dear,  an old school nil rate band discretionary trust.

To answer your intial question all the mainstream high street banks have long since abandoned providing trustee banking services, so you are pretty much stuck with the secondary banking/building society sector.

Cater allen offers competive rates, but requires introduction from an intermediary. Metro Bank is also a player.

You indicate you have had tax advice so none of the following  should be a surprise.

If under the terms of the trust income is payable at trustees discretion, then any bank interest received is taxable at 40% ( although potentially partly or wholly recoverable if mother is basic rate or non tax payer). To be noted however that the trust can be altered to grant mother an ' interest in possession ' or life interest, which brings income tax down to 20% and  may escape trustees having to submit annual trust income tax returns if the interest is mandated direct to mother's account.

The other issue is IHT. The trust has exposure to IHT on each of its 10th anniversary if its value exceeds the Nil rate band at that time. In a past post you indicated the property might sell for £500k to £600k. If it achieved top end, then trust only valued at around £300k so no actual IHT at its next IHT 10th anniversary , but still required to submit trustees' form IHT 100 to confirm no tax due since this is more then 85% of the NRB ( the de minimis limit).

Incidentally you are also aware the trust has disallowed the availability of your father's transferable residence nil rate band when your mother eventually passes?

Finally I would mention the trust has for some years had an obligation to register on HMRC's trust register, with penalties for non compliance so hopefully that was dealt with accordingly - see link below

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

Hi, my brother took advice and I have read the report, but I can't confidently say I understand everything.

I am most concerned about what you say about the trust disallowing our father's transferable residence nil rate band when mother eventually passes?

Does this mean that the ~300k in the Trust Account would attract inheritance tax?

Our mother does have a life interest, but you'll see 45 not 40% tax is mentioned.

Excerpts from the report:

The property is legally owned by <mother> and her three children, but the beneficial interest is divided so that <mother> has one half absolutely, and the other half is held on trust for <mother> for her lifetime (a life interest trust), with the remainder to the children after her death.

Advice: The current arrangements are legally correct and are generally considered effective for both inheritance tax (IHT) and care fee protection. 

Current IHT Position: <mother>’s estate (house and premium bonds) is within the combined nil rate band and residence nil rate band allowances, especially with the transferable allowances from <father>. This gives a combined IHT exemption of up to £1,000,000, so unless the estate exceeds this, there should be no IHT on her death.

Advice: No further action is needed for IHT minimisation unless the estate value increases significantly. The current structure is effective for IHT purposes.

Trust income taxed at 45% rate, but distribution options available to lower-rate taxpayers among beneficiaries.

Sorry, excuse my reference to 40%, 45% is the correct discretionary trust rate where income is paid at the trustees discretion, but note the circumstance where tweaking the trust can bring the income tax down to 20%. Your brother should revisit the advice, in this regard. The 45% tax charge, and the mechanics involved in your mother partially or wholly recovering it, can be a tedious excercise.

As for the £300k in the discretionary trust and IHT, the trust is now a standalone taxable entity with its own separate and distinct nil rate band of £325,000,  unconnected to your mother's personal taxable estate.  As such there is only a 10 yearly IHT charge  to consider ( at the reduced rate of 6%) if the trust fund value exceeds the NRB at that time, and if so the charge only applies to that excess.

However I would question the assertion in the advice that including transferable allowances   your mother's estate  would be sheltered with up to £1 million of NRBs. It is my contention that this reduces to £825k with the loss of your father's £175k residence nil rate band for the reason stated. Hopefully £825k  nonetheless suffices to shelter your mother's personal assets outside the trust.

You have not indicated how long the trust has been in exsistence, and therefore how many 10 yearly anniversaries may have already occurred, or on the immediate horizon. Although there seems no indication IHT will have been payable at any point, there may nonetheless have been a technical requirement to submit form IHT 100 for the reasons stated.

Finally, if at some point in the future  having due regard to your mother's state of health and life expectancy, the trustees decide to invest in a stockmarket portfolio to improve income prospects and achieve a measure of capital growth, bear in mind the potential for IHT if the trust fund grows beyond the current NRB.

That said, also bear in mind the resulting tax charge would only be 6%, so in the event the trust fund had grown to say £375k by the next 10 year charge point, IHT thereon would only be £3,000, a far cry from the 40% exposure if the trust assets had formed part of your mother's estate on eventual death, and illustrates the appeal of such trusts in appropriate circumstances.

roadweary

@poseidon1 - thanks for this.  I'm clearly struggling to understand all of this.....what I fathom is that the Trust mechanism was discussed in the will, that the first Deed of Appointment, set the trust up in 2020.  I understand since then that there is a requirement to register this with HMRC which is to be done imminently.

There's been no discussion about investing any of the sums in the stock market....it's not anything we have any experience in and it has been our assumption that it would just sit in the bank account.....but due to it being a Trust bank account (@NorthYorkie says it's not a Discretionary Trust but a 'Interest in Possession Trust') it seems finding any account will be a challenge....and in fact finding several to have the 85k per Bank protection even harder.

Does the type of Trust make a difference to the type of bank account?  Legally, does it have to opened as a Trust Bank Account?