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How to maximise inheritance tax relief from a discretionary trust
Has a family member passed away, leaving a rather long and complicated discretionary trust in their will? Don’t lose their tax-free allowance! Ann Christian, a partner in our personal law team explains how you can maximise inheritance tax relief from a discretionary trust.
What are discretionary trusts and why are they created?
A discretionary trust is a flexible arrangement that allows the executors of a will to manage the distribution of the deceased family member’s assets to their beneficiaries.
If the trust you are dealing with was made before October 2007, this may have been set up for inheritance tax saving purposes. Having this sort of trust could (under the tax rules then in force) save perhaps £100,000 of inheritance tax, so it was definitely worth doing!
The tax rules then changed so that a widow(er) (referred to as the widow in this article but the rules apply equally to widowers) could use their late spouse’s tax-free allowance, also known as the nil rate band or NRB. The widow’s executors would then need to claim that first allowance after her death.
What happens if the trust is not dealt with?
This change was good news for most families, but some overlooked the trust that was still in the will, and on the first death transferred all the assets to the widow. Often that is what everyone wants to happen and seems like the easiest way to deal with the estate.
The complication arises when on the widow’s subsequent death, her executors need to claim her late spouse’s NRB as it is not automatically applied. If his will contained the trust and it was not wound up after his death, his unused tax allowance is not available to transfer.
If the family did not deal with the trust at the time (and many families are unaware of the need to do so), this means that all the assets are in the widow’s name and therefore subject to tax, but there is no NRB from her late spouse to set off against them.
Is it still possible to benefit from this inheritance tax relief?
If you are in this situation, don’t worry - we can help!
If your late spouse set up a discretionary trust in their will, talk to the executors of your will. Explain that they will be entitled to the tax-free allowance that your spouse left when you die, but they will need to speak to a solicitor so that they can benefit.
If you are an executor of the widow and it has been less than two years since the first spouse died, it may be possible to bring the trust to an end and ensure that the tax-free allowance is preserved for future use.
We can still help if you are outside this time limit. We can discuss with you what has happened, then advise how best to arrange matters so the tax reliefs are maximised.
How can Ann help you?
Ann Christian is a partner in our personal law team based in Ilkley, who has a wealth of experience helping clients to plan for the future and protect their assets. She and her team have helped many families that have been in this situation and offer an expert, fixed-fee service to assist.
If you are looking to maximise inheritance tax relief from a discretionary trust or require any other assistance in relation to wealth, inheritance and estates, contact Ann on 01943 885 782 or at ku.oc1714331005.fcl@1714331005naits1714331005irhca1714331005.