BY DAVINA PURAN Solicitor, Wills Probate and Estate Planning
At the tail end of 2022, all UK trusts (with a few exceptions like charitable trusts and pension schemes) had to register using HMRC’s Trust Registration Service (‘TRS’). The TRS is a register confirming the beneficial ownership of trusts that was introduced as part of the UKs implementation of the Fourth Anti Money Laundering Directive. Initially, registration was limited to taxable trusts but the change to including non- taxable trusts saw many clients, financial institutions and practitioners alike trying to answer that all important question – is this trust registrable and if so, how do I register it? In 2023, the private client team saw a multitude of enquiries asking this very question. The one reoccurring trust that came up time and time again was the almost forgotten about nil rate band discretionary trust.
Why would you create a Nil Rate Band Discretionary Trust?
Prior to 2007, there was no transferable nil rate band between spouses. This meant if the predeceasing spouse simply left their entire estate to the surviving spouse at the time of their death, their nil rate band
would have been lost, as transfers between spouses are tax exempt.
A way to rescue that nil rate band from being lost, whilst still enabling the surviving spouse to benefit from the predeceasing spouse’s assets, was to create a trust and give a sum equivalent to the nil rate band to the trust. That way the predeceasing spouse’s nil rate band was used but the spouse, as one of the potential beneficiaries of the trust could still benefit. With inheritance tax currently at 40%, this arrangement could potentially have saved inheritance tax up to £130,000. That is why the nil rate band discretionary trust was no doubt ‘trending’ prior to 2007. The law changed in 2007 so that if someone did not use their nil rate band allowance, for example if they left their entire estate to a tax exempt beneficiary like the spouse or a charity, it could be claimed by the surviving spouse’s estate on their death.
What is the Nil Rate Band Discretionary Trust?
The nil rate band discretionary trust, often found in older wills, is where an amount equivalent to the nil rate band at the time the deceased passed away is left in trust. The nil rate band is a sum of money that a person can leave without inheritance tax becoming due and currently stands at £325,000. The trust is expressed for the benefit of a wide class of beneficiaries giving the trustees discretion as to who to benefit. Usually, the pool of beneficiaries are family members of the deceased e.g. spouse, children and grandchildren.
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