For over 20 years until 9th October 2007, the “nil-rate band discretionary will trust” was a tax planning staple for married couples. Failure to use the inheritance tax nil rate band on the death of the first of the couple to die could result in the payment of £120,000 in additional tax (at 2007 rates).
Because most married couples couldn’t afford to see ,say, £300,000 left directly to the children on the first death, most Wills provided that, on the first death,
assets equivalent to the nil rate band passed to a trust of which the survivor and children were potential beneficiaries. This made good use of the nil rate band while still allowing the survivor access to the money. Indeed, the best of both worlds.
In the 2007 pre budget report, the then Chancellor, Alistair Darling announced that with immediate effect, the nil rate band of the first to die would be transferable and could be carried forward to the second death. In a stroke, this removed the need to use a gift or trust to ensure the benefit of the nil rate band available on the first death was not lost.
While the need to incorporate a nil rate band discretionary trust in Wills to utilise both nil rate bands has disappeared and the majority of new Wills by married couples just leave all to the other on the first death, this doesn’t mean that those with nil rate band discretionary trust wills need to rush to make changes. If a husband or wife dies, the assets falling into the nil rate band discretionary trust can merely be “appointed” to the survivor.
But the transferable nil rate band hasn’t seen the demise of the nil rate band discretionary trust – leaving assets equivalent to the nil rate band (currently
£325,000) in a discretionary trustparticularly where there is a desire to bypass the surviving spouse. It is still possible to include the spouse as a potential
beneficiary, say for income purposes, whilst capital is held for other beneficiaries – say children from a previous marriage.
Leaving assets in a trust ring-fences them against the ravages of future death, mental incapacity, divorce and the attentions, generally of a future spouse. The first to die can be assured that assets are being preserved for the next generation or for the children of an earlier marriage. The assets will be outside the scope of “accessible capital” targeted by a local authority in working out the contributions to the costs of a nursing/residential home and the availability of means tested benefits.
The growth in the value of the assets will be outside the survivor’s estate for inheritance tax purposes which will more than counterbalance the loss of any
capital gains uplift to the date of death.
And finally, a discounted gift trust can, for cash flow purposes, provide access for the family to a fund (including pensions) immediately after the death of the survivor without the need to wait for probate, which can be very useful in meeting funeral costs, paying debts and meeting any residual IHT liability. So as we can see, there is perhaps still plenty of life in the old discretionary will trust…
If you have any queries, contact Jim Sawer.
This article was first published in the Holden & Partners (H&P) Review, Issue 3.