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Readers’ forum: Trust taxation

/ 25 July 2017

Terry Jordan

Writing for Taxation magazine, BKL tax adviser Terry Jordan offers advice on settlor life interest discretionary trusts.


I have three questions about a trust and hope Taxation readers will be able to advise on these.

  • First, I have received conflicting opinions on the seven years re-usable inheritance tax nil-rate band for homeowners transferring their residential properties into settlor discretionary life interest trusts. Some say the nil-rate band is re-usable and others disagree on the basis that the transfer is a gift with reservation of benefit. Who is correct?
  • Second, HMRC states that the new residence nil-rate band (RNRB) allowance may be available on any partly held property, but a residential property held in trust does not qualify for it. Let us suppose that a discretionary life interest trust holds a (fixed value) equitable interest in a property up to, say, the nil-rate band by way of a restriction. The balance of the equity would be left to direct descendants and liable for inheritance tax, so would the element not held in trust be eligible for the RNRB?
  • Third, does the 80% trust value HMRC reporting requirement for residential property apply at the time of transfer and/or annually thereafter or only six months before each ten-year anniversary?

I look forward to replies that can shed light on these issues.

Query 19,012 – Trustee.


Reply by Terry ‘Lacuna’ Jordan, BKL

Trustee refers to ‘settlor discretionary life interest trusts’. Some homeowners are being encouraged to transfer their property to trust to try to avoid future liability for care fees. Only or main residence relief for capital gains tax purposes can be preserved as long as the beneficiary is entitled to occupy the property under the terms of the settlement (TCGA 1992, s 225). Accordingly, the settlement is likely to be interest in possession rather than discretionary.

Since 22 March 2006, most lifetime transfers to trust have been immediately chargeable for inheritance tax purposes, rather than potentially exempt, with a liability to inheritance tax at the lifetime rate of 20% on the value transferred in excess of the £325,000 nil-rate band. Despite the gifts with reservation of benefit provisions being in point, such that the value of the property will remain part of the settlor’s estate, the nil-rate band is regained after seven years. The trust assets are ‘relevant property’ subject to ten-year and proportionate or ‘exit’ charges.

The new residence nil-rate band (RNRB) allowance is available when there is a charge under the reservation of benefit provisions and the property passes outright to direct descendants. Potentially, it would also be available if part of the property remains in the outright ownership of the settlor, as trustee has suggested.

The reporting requirement under the 2008 regulations, with inheritance tax returns being necessary if the value exceeds 80% of the nil-rate band, applies at the time of the transfer into trust and at the date of the ten-year and proportionate charges, but not annually or six months before each ten-year anniversary.


This article is also available to Taxation subscribers on the Taxation website.

Terry Jordan

Senior Adviser, Private Client

T +44 (0)20 8922 9360

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