IHT and discretionary trusts

Busa

I’ve a question about trusts. My mother has two properties (lucky her!) and she’s put one into a discretionary trust for my brother which he’s now living in. Does anyone know the tax implications please? If mum lives another 7 years, does that mean it’s out of IHT and all’s clear? After 7 years, does the trust have to pay any ongoing tax on the property? What if the trust dissolved and passed the house to him? It’s all very confusing! Thanks for your help.

Keep_pedalling

I think the time to ask this question was before putting it into trust. Yes it falls outside her estate after 7 years but depending on the value of the property there may be 10 year anniversary charges to pay by the trust.

How long ago was this done? What is the value of the house?

poseidon1

I take it you were not privy to the advice your mother was given when the trust was created, or why she created it in the first place.

Therefore before leaping to the conclusion that this trust is a standard discretionary trust (with all the attendant tax complications), some questions:

1. Does your brother suffer from any disabilities which entitles him to any means tested benefits?
2. At the time the trust was established, did your mother draw up or amend her will to provide for additional assets to be transferred to the trust on her death?

If the trust qualified as a vulnerable person's trust from outset, this largely avoids the stringent tax regime normally applicable to full blown discretionary trusts.

Therefore to provide a more definitive response what is the back story here?

Busa

https://forums.moneysavingexpert.com/discussion/comment/81981684#Comment_81981684

Hi, thanks for replying. It was done about four years ago and i'd say the house is worth around £300,000 (very roughly). I wasn't aware of 10 year anniversary charges - do you think the house will incur that charge and if so any idea how much it might be?

Busa

To @poseidon1 - no, I'm trying to get hold of information but she's being cagey. But in answer to your questions:

1. No disabilities and no benefits
2. I don't believe there's any further assets or that anything's mentioned in her will - my understanding is it's just the house that's already in the trust

Sorry, I don't really have much more information at the moment - I'm actually trying to find out what's going on myself (families eh?!)

poseidon1

https://forums.moneysavingexpert.com/discussion/comment/81981702#Comment_81981702

OK, assuming the trust is indeed discretionary doesn't sound like this trust qualifies for any preferential treatment. Accordingly:

1. If at the date trust was created the property was worth more than £260k ( ie 80% of the £325k nil rate band), the trust needed to reported to IHT authorities via form IHT 100. There would be no intial IHT entry charge.
2. Separately, the trust also needed to be registered and entered on HMRC's trust register via their online process.
3. As advised by @Keep_pedalling the trust will have 10 year anniversary IHT reporting obligations. If the property value exceeds the nil rate band at that time there will be an IHT liabilty at 6% of the excess above the NRB. However, assuming your mother survives the requisite 7 years and makes no other substantial gifts in the meantime, there should be no ongoing affect on her personal estate.

A discretionary trust holding illiquid property but no other liquid cash or other assets, will store up future potential tax problems for the trustees, as the property increases in value and breaches the NRB.

Clearly you are not a trustee, and frankly on your mother's eventual demise it is not obligation you would want to assume bearing in mind it seems you derive no immediate benefit from the arrangement.

In my view the only valid tax purpose of the trust might have been to defer any capital gains tax your mother may have had to pay, if having owned the property a very long time she wanted to gift it outright to your sibling. Gifting to the trust ( instead) allows something called CGT holdover relief thereby in effect transferring the untaxed gain to the trust to be held in stasis until the property is eventually sold.

However, since your mother has chosen not to explain her rationale concerning the trust, and has not involved you in anyway, you may have to resign yourself to stepping away from the whole matter. That said are you an executor under her will?

Busa

@poseidon1 thanks for that very detailed reply, I really appreciate it.

Yes, i've agreed to be an executor.

So, to clarify (sorry, this is all still new to me so taking a while to digest), I'll have to find out if the value of the property was worth more than £260k at the time the trust was set up - and if we believe it wasn't and if she survives the 7 years, then there should be no IHT implications. But if it was, she should have done the IHT and HMRC reporting and there will be IHT liability of 6% above the NRB at the 10 year anniversary?

And if the trust then gives the property to my brother at some point, then the trust will have to pay a tax on the untaxed gain (is that 6% do you know?)

Have I got that about right? 🤞

Thanks again

poseidon1

https://forums.moneysavingexpert.com/discussion/comment/81982049#Comment_81982049

You may become an eventual executor of your mother's estate, but if you are not a current trustee of the discretionary trust you have no obligation to do anything.

If your mother and brother are the current trustees any past lapse in trust HMRC tax compliance is for them to correct, but I find it difficult to believe your mother entered into this arrangement without any professional advice and assistance.

If there is a solicitor in the background surely your first port of call if you feel you need to get involved, must be to be brought up to speed on all aspects of why the trust was created in the first place, and what ( if any) was the exit plan for terminating the trust in future. If your mother insists on being less than forthcoming, difficult to see what you can actually do at this stage to help.

If she is wholly unaware that the trust could face 10 yearly IHT charges in future, this does not bode well for the competency of the advice she originally received.