Guidance

Practice guide 70: nil-rate band discretionary trusts

Updated 24 June 2015

Applies to England and Wales

Please note that HM Land Registry’s practice guides are aimed primarily at solicitors and other conveyancers. They often deal with complex matters and use legal terms.

1. Overview

In this guide:

‘beneficial joint tenancy’ means the joint ownership of land by two or more people, each of who is entitled to the whole property, rather than to an undivided share in it. When one of them dies, the others are automatically entitled to the deceased owner’s share of the land, whatever any will may say

‘conveyancer’ means an authorised person within the meaning of section 18, Legal Services Act 2007 who is entitled to provide the conveyancing services referred to in paragraphs 5(1)(a) and (b) of Schedule 2 to that Act, or a person carrying out those activities in the course of their duties as a public officer. It also includes an individual or body who employs or has among their managers such an authorised person who will undertake or supervise those conveyancing activities (rule 217A of the Land Registration Rules 2003)

‘tenancy in common’ means the joint ownership of land by two or more people, each of who has a notional, although undivided, share in the property. When one of them dies, their share may pass under their will.

1.1 Nil-rate band discretionary trusts

A discretionary trust is one whose trustees have discretion about how to use the income generated by the assets placed in trust and how eventually to distribute those assets among a class of potential beneficiaries.

A nil-rate band discretionary trust is a version of such a trust used in estate planning to reduce liability to Inheritance tax on the death of a surviving joint proprietor. It is commonly used in areas where residential property prices exceed the Inheritance tax threshold, with the additional aim of avoiding the need to sell the family home to meet Inheritance tax liability.

Such a trust can also be used to protect assets that are intended to go to particular beneficiaries (eg children from a previous relationship) in the event that the survivor remarries.

It can also protect assets that otherwise could be liable to means testing if the survivor had to go into long-term care, or could be vulnerable to creditors if the survivor got into financial difficulties.

2. How the trust works

2.1 Trust created before the first death of a joint proprietor

If any real property to be involved in the trust is not already held under a tenancy in common, the proprietors sever their joint tenancy.

Each spouse or civil partner makes a will leaving a bequest equal to the value of an individual’s Inheritance tax exemption (the ‘nil-rate band’), which, on the first partner’s death, will pass not to the surviving partner but to trustees who will hold it under the terms of the trust, also created by the will, for a class of discretionary beneficiaries, usually including the surviving partner and the children and/or grandchildren of the family.

Normally, the surviving partner can benefit from the trust by receiving discretionary payments or loans from the trustees.

When the surviving partner dies, the property held under the trust does not form part of their estate, and the surviving partner’s beneficiaries save the Inheritance tax that would have been payable on its value.

By contrast, if the joint proprietors hold the property as beneficial joint tenants and make no discretionary trust arrangements in their wills, after the second death the whole estate will pass to the survivor’s heirs, subject to Inheritance tax. The liability to Inheritance tax will normally be reduced only by the survivor’s individual exemption, and if the family home forms the bulk of the estate it may have to be sold to meet the Inheritance tax liability.

2.2 Trust created after the first death

If spouses or civil partners whose families would benefit from such a scheme do not take the necessary steps before the first death, the surviving partner and their family can enter into a deed (often called a deed of family arrangement) to create one.

The deed will vary the disposition of the property comprised in the deceased’s estate that has already taken place at the time of the death – whether effected by will, under the law relating to intestacy or otherwise (for example, under a right of survivorship in respect of joint property) – in order to put the appropriate scheme in place and permit the Inheritance tax savings described in Trust created before the first death of a joint proprietor.

Provided this is done within the period of two years after the first death, tax law treats the arrangements as if they had been made by the partner who has died (see section 142 of the Inheritance Tax Act 1984).

3. Implications for HM Land Registry

What is permissible under tax law may not be permissible under general property law. Consequently, applications may be lodged in connection with a nil-rate band discretionary trust that are misconceived and incapable of being completed by registration (see below).

3.1 Applications based on post-death ‘severance’

HM Revenue & Customs will accept a purported severance in the instrument of variation for tax purposes, but it has no effect in general property law. A beneficial joint tenant acquires absolute ownership of the entire property on the death of the other owner(s), as discussed in more detail in ‘Severance’ by the surviving beneficial joint tenant. If an application is lodged to enter a Form A restriction on the basis of a post-death severance, it will be rejected.

Property may, however, become the subject of a trust as a result of other actions taken by the surviving partner.

3.2 Applications following equitable charges and assents of equitable shares

In a typical case, the value of the deceased partner’s equitable share in the family home will form part of the assets to be put into a nil-rate band discretionary trust. The value of the equitable share cannot be realised without selling the property, and if the surviving partner wishes to carry on living there, this may not be possible.

Instead, the deceased partner’s personal representatives charge the share to the trustees to satisfy the bequest. Typically, the personal representatives then make an assent, subject to the charge, to the beneficiary.

The assent of the equitable share cannot be registered. The equitable charge of the equitable share cannot be registered or protected by notice.

Applications following a charge and an assent of the equitable share to the surviving partner are sometimes accompanied by a request to cancel an existing Form A restriction. Such a request is misconceived in view of the charge having been created on an equitable share.

4. Appropriate application following the creation of a nil-rate band discretionary trust

The position of the surviving partner, the personal representatives, the trustees and the beneficiaries in making any application is discussed in Background: property law and land registration issues.

In most cases, the only appropriate application will be to remove the deceased joint proprietor’s name from the register and to register a standard Form A restriction, where one does not already exist.

For general information on making such applications, see practice guide 6: devolution on the death of a registered proprietor and practice guide 19: notices, restrictions and the protection of third party interests in the register.

5. Background: property law and land registration issues

5.1 ‘Severance’ by the surviving beneficial joint tenant

Various tax statutes permit the ‘post-death severance’ of a beneficial joint tenancy. However, whatever the tax legislation provides, there is no alteration to the fundamental principles of real property law. So that:

• where A and B were jointly wholly entitled to the beneficial interests and were, immediately before the death of A, holding as beneficial joint tenants, immediately on the death of A, B becomes the sole legal owner. There are no beneficial interests. They have been subsumed into the legal estates. If a third party has contributed to the property, however, the law may have imposed a resulting or constructive trust, which will not be obvious

• if B wishes to ‘sever’, B cannot do so. There is nothing to sever

• what B must do is create a new trust of land in which B declares B holds on trust for B and the personal representatives of A

• such a trust must, to be enforceable, comply with one or other of sections 52 or 53 of the Law of Property Act 1925. In particular the trust must be either by deed or in writing. This would undoubtedly be a disposition for the purposes of the Trusts of Land and Appointment of Trustees Act 1996 and hence could contain limitations on trustees’ powers

5.2 Who can, or must, make an application for a restriction after the creation of a nil-rate band discretionary trust

5.2.1 The surviving proprietor

• Immediately B declares the trust, B is under a statutory duty to apply for a Form A restriction (rule 94(1)(a), Land Registration Rules 2003)

• If the trust B declares contains limitations on the trustees’ powers, then B must also apply for a restriction in Form B (rule 94(4) of the Land Registration Rules 2003)

• Failure by B to apply for a restriction when required is a breach of B’s trustee duty. B would, in principle, be liable for any loss caused by B’s failure

5.2.2 The personal representatives

• The personal representatives of A, who now hold an interest under a trust of land, may apply for a restriction in Form A (and Form B if the trust deed contains limitations on the trustees’ powers) using rule 93(a) or (c) of the Land Registration Rules 2003 as their authority

• An application for a restriction in Form Q is also possible with supporting evidence (normally a copy of the trust deed) that the trust deed or disposition imposes a requirement for the personal representatives’ consent

• If the trust disposition contains consent requirements, the personal representatives of A (as owners of A’s beneficial share) can apply for a restriction along the lines of Form N

5.2.3 The trustees

• Where a standard Form A restriction has not been registered the trustees may have to apply for one in order to comply with their obligations as trustees

• If the trust contains limitations on the trustees’ powers, they must also apply for a restriction in Form B (rule 94(4) of the Land Registration Rules 2003)

• A standard Form N restriction in favour of the trustees of the discretionary trust can be entered if a valid application is made by or with the consent of the surviving proprietor. If the surviving registered proprietor is one of the trustees of the discretionary trust, they can be named with the other trustees in the Form N restriction

5.2.4 The beneficiaries

• If the trustees fail to apply for a Form A restriction, any beneficiary can do so.

• If the trust deed imposes a requirement for the beneficiaries’ consent, a beneficiary can apply, with supporting evidence, for a restriction in Form B or Form N.

5.3 The position of the surviving partner after the creation of the nil-rate band trust

Once a Form A restriction has been entered in the proprietorship register, B cannot sell or charge the legal estate held in the land trust as the sole registered proprietor if capital money arises on the transaction, and any application to register a charge will be rejected by HM Land Registry because it offends the law.

If a Form A restriction is entered in the proprietorship register, B can effectively charge the legal estate held in the land trust if they appoint another trustee to act with them. Whether the legal estate should be charged is a matter of the express trust and trust law. One effect of charging is, of course, to diminish the value of all the equitable interests held under the land trust.

B can charge their beneficial share. Such a charge is not a charge on the land and so cannot be registered. It cannot be noted either as it not a charge on a legal estate but on an equitable interest under the land trust. Consequently, no unilateral or agreed notice will be accepted by HM Land Registry in relation to it. Nor will HM Land Registry accept an application to protect a charge by entry of a restriction in the proprietorship register, other than a Form A restriction where one has not already been registered.

5.4 Where the survivor is also the personal representative

Under nil-rate band trust arrangements it is quite common for the personal representatives of A to charge all or part of the nil-rate band legacy and/or any property that forms part of it to the nil-rate band trustees of A. Quite often A’s personal representative will be B, the surviving registered proprietor.

Confusion results because:

• practitioners confuse B’s capacities. B at this point is holding the legal estate in the land as sole trustee. B is holding their own equitable interest absolutely. B is also A’s personal representative holding A’s equitable interest under the will trust. B can do some things in one capacity and some things in another. What B cannot do, if a Form A restriction has been entered in the proprietorship register, is charge the legal estate if capital money arises (because B is still sole trustee of the land trust)

• B can, if empowered to do so by the terms of the trust, charge the beneficial share they are holding as personal representative. This is a charge of an equitable interest. It cannot be registered. It cannot be noted in the register. It is of no interest to HM Land Registry except to the extent that its existence means that the legal estate is held under a trust of land that warrants the entry of a Form A restriction if one is not already registered

• If B, as personal representative of A, assents to the share, this assent is of no interest to HM Land Registry. It is not of the legal estate. It cannot be registered or noted. However if the share is assented to B and, as a result, B becomes entitled to all of the beneficial interest under the land trust free from any encumbrances created by A prior to death or by B, B can apply to cancel any Form A restriction as there are no beneficial interests and B is entitled to the legal estate absolutely. B may also apply to withdraw any restrictions in Form B or along the lines of Form N, as the trust has ended

• If B, as personal representative of A, charges the beneficial interest held in A’s estate and then assents to the share, again this assent is of no interest to HM Land Registry. It is not of the legal estate. It cannot be registered or noted. However, in this case the trust has not ended because as long as the encumbrance exists on the share, there is a trust of land. There has been no unencumbered unity of beneficial interests with the legal estate. B cannot apply to cancel any Form A restriction

5.5 Loans by the trustees

Sometimes the nil-rate band trustees are allowed to make loans and to accept repayment promises in relation to the loans. They may also accept security for those loans. The security offered may be:

• B’s personally beneficially owned share

• the share in the estate of A of which B is the personal representative. In both of the above scenarios, the security is an equitable charge of an equitable interest. It cannot be registered. It cannot be noted. An application to enter a restriction cannot be accepted, other than an application for entry of a Form A restriction in the proprietorship register if one has not been registered already, because the charge is a derivative interest

• B’s legal estate held as trustee. In any case where B is the sole registered proprietor and a Form A restriction has been entered in the proprietorship register, any application to register a charge of the legal estate will be rejected by HM Land Registry

6. Bringing the trust to an end during the surviving partner’s lifetime

A nil-rate band discretionary trust may subsequently be found to offer no tax advantage, either because of the introduction of transferable nil-rate band on the death of the second partner on or after 9 October 2007 (sections 8A-8C and 151BA of the Inheritance Tax Act 1984 (as amended by schedule 4 to the Finance Act 2008)), or because increases in the individual IHT exemption have taken the nil-rate band above the combined value of the assets in the trust and the survivor’s own assets.

If this is the case, a surviving partner may, with the agreement of the trustees, decide to bring the trust to an end in order to make the assets available during their lifetime. Provided it takes place within two years of the first partner’s death, HM Revenue & Customs will treat an appointment of the trust assets in favour of the survivor as if they had been left to them outright.

The appointment is of no interest to HM Land Registry, as it is not of the legal estate. But if, as a result, the surviving partner becomes entitled to the whole of the beneficial interests free from any encumbrance, they may apply to cancel any Form A restriction, and those with the benefit of other restrictions can apply to withdraw them.

A statutory declaration or statement of truth by the applicants, or a certificate by their conveyancer, that none of the beneficial shares in the property has been encumbered will need to accompany an application in form RX3.

Practice guide 73: statements of truth gives information about the use of statements of truth in support of applications to HM Land Registry.

7. Things to remember

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