GUIDANCE FOR COUPLES WITH NIL-RATE BAND DISCRETIONARY TRUST WILLS – Should we keep them or change the Wills?
Before 2007 many couples made Nil-Rate Band Discretionary Trust (NRBDT) Wills to ensure each spouse used their ‘Nil-Rate Band’ to maximise relief from Inheritance Tax and to protect assets for the future.
The ‘Nil-Rate Band’ is the value (certain assets get special exemptions) that an individual can give away free of Inheritance Tax (IHT), to beneficiaries who are not exempt from IHT, such as children. Charities and a spouse or civil partner benefit from special exemptions. For 2012/13 the Nil-Rate Band is £325,000.
Before October 2007 if the Nil-Rate Band was not used on first death (to make gifts to beneficiaries who were not exempt from IHT), it was lost to the surviving spouse who was left with only their individual Nil-Rate Band. NRBDT Wills were used to prevent this happening.
In his Pre-Budget Statement in October 2007 the Chancellor announced changes to the IHT regime for married couples and civil partners. The effect of the announcement, was that the IHT allowance applicable upon the death of the surviving spouse or civil partner may be increased according to the unused percentage of the IHT allowance on the death of the first spouse or civil partner. The unused IHT allowance of the first to die became transferable to the surviving spouse.
If a Will on first death leaves everything to the surviving spouse or civil partner, the IHT allowance on second death can effectively be doubled. With the current IHT limit of £325,000 this means a £650,000 IHT allowance on second death.
These changes became law in the Finance Act 2008 and are effective for deaths on and after 9th October 2007.
When Wills are reviewed we are asked whether couples still need these Trusts given subsequent changes in the Law.
In each case family and financial circumstances will be different and this may affect the advice we give. In many cases we do not advise couples who have existing NRBDT Wills to make alterations.
NRBDT Wills provide a great deal of flexibility. If on first death, in the light of circumstances as they then exist, it is considered appropriate by the Trustees that the surviving spouse takes all the assets within the Trust, a simple form of appointment (a short legal document) can be made to achieve this. The effect will be the same as if the Will had simply left all assets outright to the surviving spouse. Having done this, upon the survivor’s death, a claim can be made for two IHT allowances at the rate then available (which may be higher than when the first spouse died).
There are a number of reasons however why it may be preferable to implement and use the Trust arrangements. As expert Solicitors we can advise.
The Trust can potentially protect assets for future generations.
The Trust has the potential to protect assets if the surviving spouse or partner gets into financial difficulties, re-marries or enters means tested long-term care. The survivor might lose mental or physical capacity to deal with their own affairs and this vulnerability may leave them exposed to financial abuse by third parties. The Trustees can be of help and support to the survivor as they get older.
The Trust may also allow greater advantage to be taken of IHT relief applicable to assets which qualify for special IHT reliefs as either Agricultural Property or Business Property. The types of assets involved and assumptions about how they will increase in value needs to be carefully considered. A view will need to be made about whether it would be advantageous for assets to grow in value outside the surviving spouse’s estate, or whether they would be better included on the basis that the Nil-Rate Band will possibly increase more – to an amount ultimately determined on the survivor’s death. There is however no guarantee that the Nil-Rate Band will increase (it has been frozen for the last 3 years), and it could be reduced or abolished. IHT is an important political issue and therefore susceptible to change.
The simplicity of leaving assets outright to one another may well be appealing and will be the best solution for some couples. The multiple benefits of Discretionary Trusts should not be overlooked. Expert Professional advice is essential.
Other forms of Trust may now however be considered more appropriate to NRBDTs, particularly if a couple’s estate is worth more than £650,000. It is important to take advice.
If a couple do just leave things to one another on first death, a formal claim for the un-used allowance of the first to die will need to be made on second death. Accurate record keeping on first death will be essential, particularly if on first death some gifts are made to other beneficiaries and a proportion of the Nil-Rate Band of the first to die is used.
An initial meeting with us is free of charge if you wish to discuss these matters in more detail and find out how we can help you.