THE MATRIMONIAL HOME.

Many people will not have £285,000of cash to place in a Discretionary Trust but they may have a very valuable home which would still attract Inheritance Tax.

Two problems exist with the case of the Matrimonial home in a nil rate band Discretionary Trust:

• Under the terms of most couple's ownership the home would be inherited by the survivor without reference to the Will.
• It appears that if the surviving spouse is granted the right to occupy the house under a Discretionary Trust the revenue regards this still as taxable.

These problems can be overcome by changing the type of ownership of the house from ‘joint ownership' to ‘tenants in common'.  The wording of the Discretionary Trust in each Will settles only the half of the house owned by the deceased into the Trust.  The survivor occupies the whole house by virtue of their share.

The system can work as follows:

Firstly, Mr. & Mrs Prudent divide their home so that it is owned as Tenants in Common (each owns half).  They then each draw up Wills which settle up to the nil rate band of the value of their half of the home on a Discretionary Trust with a wide range of beneficiaries (including their partner, children, etc). 

Following Mr. Prudent's death, Mrs Prudent lives in the house by virtue of her right as a Tenant in Common.  The other Tenant in Common is a Trust of which she and Mr. Honest (the Solicitor) are Trustees.  Mrs Prudent can therefore control the destiny of the house (e.g. sell, buy or raise a mortgage etc) and benefit from living there but never actually own all of the property.  On Mrs Prudent's death she leaves her half of the house to her children and she instructs her co-Trustee Mr. Honest to wind up the Trust - also in favour of the Children.

THE DISADVANTAGES.

As always, there are some negative points to this scheme:

• It is very unwise to include another Trust in the Will with one of this type.  In most cases this is, however, not an issue.
• The setting up and administration of a Trust Fund costs money, although the outgoings are very small in proportion to the potential tax saving.
• The Capital Gains Tax exemption that applies to a principle residence will be lost on that part of the home held in Trust.  Nevertheless, £4,400 allowance* exists which will help reduce the gain.  In any event, this consideration will be very small in comparison to the savings achieved.