Review long running NRB discretionary trusts in the light of the FA 2013 changes

 In Gill's Blog, Trusts

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Tax law has a habit of changing and certainly in the 20 or so years since Nil Rate Band Discretionary Trusts (NRB DT) were popular it has changed for income tax as well as IHT purposes.

The trust income tax rates have been increased significantly and although currently a little less than last tax year it is still necessary to pay 45% income tax on non-dividend income in 2013/14.

FA 2013 changes

On 17 July 2013 the contentious provisions amending IHTA 1984 and its treatment of debts and liabilities on death came into force for deaths on or after that date. A new s.175A IHTA 1984 Discharge of liabilities after death will therefore apply to old debt and charge schemes where the second spouse dies on or after 17 July 2013.

This means that liabilities will only be deductible in determining the value of an estate for IHT purposes if they are actually repaid out of the estate on or after death unless there is a real commercial reason for the liability to remain outstanding.

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This clearly produces practical administration problems since at the point at which you submit the IHT400 you might not know whether a liability is to be discharged and whether or not a commercial arrangement exists if it is between family members, trusts or family companies.

What do HMRC expect you to do?

However, in the HMRC Trusts & Estate Newsletter for August 2013 HMRC state:

“ When it comes to filling in a form IHT400 with regard to s.175A, as most liabilities are at arm’s length, HMRC’s expectation is that they will be repaid. Unless personal representatives are certain that a particular liability will not be repaid and should not be deducted, all the deceased’s liabilities at death may be included in the form. It will only be necessary to provide evidence that the loan has been repaid where HMRC enquire into the deduction of a liability.”

The accompanying guidance says at paragraph IHTM 28030 there is no need to investigate clearly commercial and arm’s length transactions like utility bills but where the liabilities are not due to arm’s length creditors e.g. debts due to family members, family trusts or companies you will be expected to provide evidence that the money has been repaid out of the estate e.g. produce a copy of the PRs’ bank statement.


In cases where the value of a debt or charge created under a NRB DT increases in line with an index the prospect of a significant amount of growth in value on the original debt or charge will be crystallised once the trustees decide to call in the debt or a trigger operates to bring it to an end. It is not unknown for some smaller estates to be below the current NRB IHT threshold of £325,000 and therefore not subject to IHT anyway but to have an indexed amount of over £20,000. Thus the indexed amount has no relevance for IHT but now causes a potential income tax headache depending on whether income tax falls to be charged on the particular loan because of the wording of the arrangements in the Will and the loan documents.

When the loan is called in the indexed amount crystallises so that when the trustees pay money over to their beneficiaries that element which relates to income will be immediately subject to an income tax charge and 45% income tax will have to be paid and returned by the trustees before distribution to the beneficiaries. Given the nature of these types of trust it is unlikely that there will be any tax pool to frank the distribution so the tax has to be paid in full.

If the trustees agree to waive their right to interest or a return before the debt is repaid and so reduce the value of the debt and avoid that part of the repaid amount representing income this is the very part which is now caught by the s.175A IHTA 1984 change for IHT. You will get the income tax benefit but no deduction of the amount waived for IHT purposes.

All these old NRB DTs need review whilst the surviving spouse is alive and a plan of action should be considered in anticipation of death.

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