The idea of a Nil Rate Band Discretionary Trust (NRBDT) in a Will is to ring fence up to the value of the Nil Rate Band (£325,000 at the time of writing) so that your loved ones have continued use of the assets held by the trust (cash or other types of investments included) but they cannot loose them. Anything placed in the Trust never goes into the estate of the beneficiaries of the trust.
The Executors and Trustees named in the will decide what assets and investments go into the trust and they can remain inside the trust for up to 125 years. These assets inside the Trust cannot be taken into account when a person is means tested or in a divorce settlement as they do not belong to the beneficiary, they belong to the trust.
If the trust has less than the Nil Rate Band in it then there are no Periodic Charges but if the trust has more than the Nil Rate Band in it the taxation calculations go as follows:
Inheritance Tax is due @ 6% over the excess of the Nil Rate Band (£325k)
For example, if a Discretionary Trust holds, £335,000 it will pay tax on (£335,000 £325.000)
£10,000, taxed at 6% (£600) (Technically it is taxed at 30% of the lifetime rate – i.e. 30% of 20% but for simplicity use 6%!)
A trust that holds 80% of its lifetime allowance must report to HMRC. Therefore a trust with £260,000 or more must complete and IHT100 on its death anniversary.
In terms of what is in the trust:
1 Trust current value +
2 Trust Capital paid out +
3 Trust Income Paid out+
4 Aggregated value of related (same day) settlements.
If the above is greater than £260,000 a report needs to complete. Above £325,000 then Inheritance Tax is due.