Terminology explained

Discretionary Trusts

A Discretionary Trust is a legal arrangement where trustees have full discretion on how and when to distribute assets to beneficiaries. This type of Trust is useful for managing assets on behalf of beneficiaries who may not be ready or able to handle their financial affairs.

Holding period

The holding period refers to the minimum time an asset must be retained to qualify for certain tax reliefs. Shares in Business Relief-qualifying companies, must be held for at least two years by the deceased before their death to be exempt from IHT.

What is the Nil Rate Band (NRB)?

The Nil Rate Band (NRB), also known as the IHT threshold, is the amount up to which an estate has no IHT to pay.

Each individual’s estate can benefit from the NRB. The £325,000 NRB has been frozen since 2009 and is fixed until April 2028 at the earliest. With asset value inflation, this means more people have been falling into the IHT net and will continue to do so. This is known as fiscal drag.

The Nil Rate Band and Discretionary Trusts

Transferring assets into a Trust is useful as it removes those assets from the estate, but a 20% lifetime IHT charge is immediately payable if the transfer value and all previous Chargeable Lifetime Transfers in the last seven years, when added together, exceeds the Nil Rate Band.

Crucially, no IHT is payable when BR qualifying shares are transferred into a Discretionary Trust, so there is no need to limit the amount transferred to less than the available Nil Rate Band to avoid a 20% lifetime IHT charge.

However, the trustees must retain ownership of the BR qualifying shares (or any replacement business property) for two years or until the death of the settlor, if earlier. 

In addition, the transfer of the assets into trust doesn’t use any of the deceased's Nil Rate Band, meaning it remains available to use against other assets in the estate.

Case Study

Take a look at how the NRB and Business Relief interact with Sam’s estate planning

> Two years ago, Sam, 75, transferred £300,000 of assets into a Discretionary Trust.

> He has just received a windfall and wants to transfer another £350,000 into the Trust.

> But this means that he would be liable to an immediate 20% Lifetime IHT charge for the value of the second transfer above the available Nil Rate Band (£325,000 x 20% = £65,000).

> Instead, he is advised to invest the £350,000 into BR qualifying shares and to hold them for two years.

Once the minimum holding period is achieved, he can transfer them to the discretionary trust without the IHT liability.

Transferring the Nil Rate Bands

Each individual has their own NRB. For married couples and members of a civil partnership, it is possible for any unused proportion of the NRB of the first spouse or civil partner to be transferred to their survivor.

This means that any part of the NRB that is not used when the first spouse or civil partner dies can be transferred to the surviving spouse or civil partner for use on their later death.

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Opinions expressed represent the views of the author at the time of publication, are subject to change, and should not be interpreted as investment or tax advice.

Important notice: This article is for investment professionals only. This article is for information only and does not form part of a direct offer or invitation to purchase, subscribe for or dispose of securities and no reliance should be placed on it. No reliance should be made on this content to inform any investment of tax planning decision.

This content contains information that is believed to be accurate at the time of publication but is subject to change without notice. The explanation of all of the tax rules set out have been written in accordance with our understanding of the law and interpretation of it at the time of publication.

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