Where a married couple leave everything to each other in their Wills it is now, not only exempt from Inheritance Tax under spousal exemption, but they have not used their own Nil Rate Band (NRB) allowance of £325,000 and it can be transferred to their surviving spouse or civil partner. This will therefore increase the individual’s allowance on second death from £325,000 to £650,000 provided they left their entire Estate to their spouse on first death. Where there have been gifts to other family members or friends on the first death, which are below the NRB allowance, it is possible to transfer the unused part of the NRB allowance to surviving spouse or civil partner.
Pre-2007 it was common to insert into Wills (for couples who had Estates over £325,000 either solely or combined with their spouse) a Nil Rate Band Discretionary Trust, in an attempt to preserve the value of the deceased party’s RNB allowance and save IHT. Before the law changed, if the entire Estate was left to a surviving spouse the RNB allowance was lost and on the death of the survivor only their own NRB allowance of £325,000 could be used. Therefore, from a tax planning point of view, it made sense for the first spouse to die to utilise their RNB, for example by leaving £325,000 to their children. However, a small problem with the above was that many married couples simply could not afford to leave £325,000 to their children in the first instance. Because of this, the Nil Rate Band Discretionary Trust became a popular way for Wills to be prepared.
However, with the introduction of the TNRB, Nil Rate Band Trusts were no longer of such significant value in Wills. If anything, schemes such as the Nil Rate Band Discretionary Trust of this nature were effectively redundant for IHT purposes. Now there is effectively no need for complex trusts, which helps to avoid the continuing professional costs and assists with not burdening the family to act as Trustees themselves. The surviving spouse simply inherits everything and then leaves it to the ultimate beneficiaries, but with the benefit of two NRB allowances calculated at the rate applying on the second death.
It is worth considering your current Will, especially if you have included a Nil Rate Band Discretionary Trust. Keeping this type of trust in your Wills can lead to complications upon the first person’s death and the future management of family affairs. A Discretionary Trust is one in which the trustees have `discretion’ as to how the trust income and maybe the trust capital is applied. The trustees are the legal owners of the assets. Any income received by the trusts is taxed and will need to be reported annually to HM Revenue & Customs. Furthermore, trust income in excess of £1,000 is taxed at special trust tax rates. Payments made by the trust to a beneficiary carry a tax credit at the trust tax rate, currently 45%. There are of course further tax implications.
It is possible for the trust to be terminated on first death, however this can again incur extra costs and time spent. If the trust is to be terminated in the surviving spouse’s favour then it is essential that this is done within two years of the first death so that the TNRB allowance is available. A formal deed of appointment will need to be drawn up to implement this. If more than two years have passed since the first death it will not be possible for the deceased spouse’s NRB to be claimed by the surviving spouse. Although it is possible for the Nil Rate Band Discretionary Trust to be constituted retrospectively, it is easier, less time consuming, cheaper and generally preferable to take action immediately after the first spouse dies when all options are still open.
Although in many cases they are now an unnecessary complication, Nil Rate Band Discretionary Trusts can still have their uses. The application of the TRNB allowance albeit more straightforward, it is of course dependant upon your own individual circumstances as to which Will will be correct for you. It is therefore recommended that you review your Will in regular time period intervals and if you have questions arising from your current Will, seek advice from a legal professional.