Margaret: business relief, the residence nil rate band trap and a discretionary trust

Chargeable estate

Asset	Value	Relief
Home	£1,400,000	-
Quoted portfolio	£900,000	-
Thornbury shares	£3,600,000	100% BPR (unquoted trading company shares, held over 2 years, not excepted assets)
Net estate	£2,300,000

Available nil rate band: £325,000 + 100% transferable = £650,000.

Residence nil rate band - the trap. The taper test uses the value of the estate before business relief. E = £1.4m + £0.9m + £3.6m = £5,900,000. Reduction = (£5.9m − £2m)/2 = £1,950,000, which exceeds the £175,000 band. The RNRB (and the transferred RNRB) is nil. Business relief removes value from the tax base but not from the £2m taper test - this is the single most expensive mistake in the case.

Tax: (£2,300,000 − £650,000) × 40% = £660,000.

The discretionary trust is not part of her estate and does not affect this figure.

Gift of £600,000 cash or quoted shares (September 2025) - a PET.

• If she survives to September 2032: no tax on the gift, and the estate is £1,700,000, taxed at (1,700,000 − 650,000) × 40% = £420,000. Saving £240,000.
• If she dies within 7 years: the PET fails. NRB available is £650,000 - the May 2015 settlement is more than 7 years earlier, so it does not cumulate. The PET is within the NRB, so no tax on the gift but £600,000 of NRB is consumed. Estate tax then = (2,300,000 − 600,000 − 50,000) × 40% = £660,000 - exactly what it was. Net saving nil.
• Taper relief is worthless here: it only reduces tax on the PET, and that tax is nil.

The whole value of the gift is therefore the seven-year survival.

Gift of Thornbury shares instead - BPR applies to the lifetime transfer, so the chargeable value is nil and no NRB is used even on early death. But:

• She would give away assets already 100% relieved, so there is no immediate IHT saving; future growth is also already relieved.
• She loses the dividends and her 30% voting position, and the son must keep the shares for relief to survive.
• The only gain is on the RNRB taper: E falls to £2.3m, giving an RNRB of £175,000 − £150,000 = £25,000, worth £10,000.

Recommendation: keep the Thornbury shares (100% relieved and growing outside the charge), make the £600,000 gift from cash/quoted shares, and start the clock now at 78. Cover the £660,000 exposure with a whole-of-life policy written in trust (premiums funded from income should fall within the normal expenditure exemption), and consider regular gifts out of her £14,000-plus dividend income. Gifting £3.9m to drag E under £2m is not worth it to recover £70,000 of RNRB.

The trust is a relevant property trust, so a ten-year anniversary charge falls on 10 May 2025.

Charge = 30% × 20% × (value − available NRB). Assuming Margaret made no chargeable transfers in the seven years before she settled the trust, the trustees' available nil rate band is the full £325,000:

30% × 20% × (£700,000 − £325,000) = £22,500.

If the £500,000 settlement had itself reduced the trustees' band (a point to verify against the 2015 file and any earlier transfers), the charge would rise towards £42,000 - check before calculating.

Practical points:

• Tax is due six months after the anniversary; the trustees can elect to pay by ten yearly instalments where the tax relates to property that qualifies.
• The rate set at this anniversary fixes the exit charge for distributions in the next ten years, so any distribution soon after is relatively cheap - worth considering if the son is to be a beneficiary.
• No further charge on Margaret's death: the 2015 settlement is more than seven years before now, so the s.62 top-up to the death rate no longer applies.
• Do not add further capital: an addition would be a fresh chargeable transfer, suffer an immediate 20% charge above her available NRB, and increase the value subject to the next ten-year charge. If she wants to move more wealth, a PET to the son or a gift into a bare trust is more efficient.