Do we still need Nil Rate Band Discretionary Trusts in our Wills?
Every individual can gift up to what is known as the Nil Rate Band (which is currently £325,000) on their death before their estate becomes subject to Inheritance Tax. Any amount gifted in excess of the Nil Rate Band is taxed at the current rate of 40% unless passing to an exempt beneficiary such as a spouse or charity.
Prior to the implementation of the double Nil Rate Band allowance in 2007, if one spouse left everything to the other, they would lose their Nil Rate Band allowance because assets passing on death from one spouse to the other are exempt from Inheritance Tax irrespective of the value passing. Therefore the first spouse to die in effect lost his or her Nil Rate Band due to the availability of spouse exemption so couples incorporated Nil Rate Band Discretionary Trusts in their Wills to ensure both Nil Rate Band allowances are utilised.
The Double Nil Rate Band Allowance
In 2007, the Government introduced the double Nil Rate Band allowance which stipulates that if the Nil Rate Band allowance of the first spouse to die was not utilised or only partially used on their death, then the executors of the second spouse to die could claim and increase of the second spouses allowance increasing the same by potentially 100%. So for example if the Nil Rate Band allowance at the time of the first spouse to die was say £325,000 and the allowance at the time of the second spouse’s death was say £400,000, then provided the first spouse had not used their Nil Rate Band allowance, then the second spouse’s executors can claim a 100% increase of that spouses’ Nil Rate Band allowance thus increasing it to £800,000.
Having said that the value of any specific or pecuniary legacies couples have in each Will, together with the value of any lifetime gifts made by couples in excess of £3,000 per annum within seven years prior to their respective deaths, will reduce their respective Nil Rate Band allowance, which would mean that the Nil Rate Band allowance of the first spouse to die will not be fully available for the estate of the second spouse because some of it would have been used up by the value of the bequests or lifetime gifts. Therefore the second spouse would not benefit from a full 100% increase of his or her allowance but only a partial increase.
It could therefore be argued that the Nil Rate Band Discretionary Trust which in effect minimises tax in a similar way to the double Nil Rate Band allowance is no longer required and that they should be taken out of the Wills so that the double allowance can be relied upon.
Having said that, there is no guarantee that the double Nil Rate Band allowance will still be available on the death of the second spouse.
Couples should also consider the following points when deciding whether or not to retain or remove the Trusts from their Wills:
- The double Nil Rate Band allowance must be claimed by your Executors at the time the death of the second spouse and it is potentially at the discretion of HM Revenue & Customs whether they accept the claim. Paperwork such as probate papers, Inland Revenue forms, copy of the marriage certificate and suchlike must be available when the claim is submitted. Problems may arise if such paperwork is lost.
- The allowance must be claimed within two years of the date of your death provided it is still available as previously stated.
- If the surviving spouse moves into a care home, despite being a beneficiary of the Trust, the capital and income from the Trust should not be taken into account when considering their assets for care fees.
- Assets passing into the Trust can be protected from passing to undesirable third parties in the event of the second spouse falling into the hands of the ‘wrong people’ such as carers or friends.
- To run the trust, the Trust will have to be registered with the HM Revenue & Customs, the Trustees will have to hold meetings from time to time to ascertain the needs of the beneficiaries and deal with any matters relating to the trust. The Trustees will also be required to submit yearly returns to the Revenue and if the Trustees instruct professionals to assist with these returns, those professionals will have to charge for their time. There will therefore be ongoing expenses in running the trust. Having said that however, the Trustees’ meetings can be held every other year over the phone and the Tax Returns will not need to be completed in much detail unless the Trust assets generate income.
- If the Trusts are retained, the trustees of the first spouse to die can terminate the Trust at the time of that spouses death so that the Trust no longer applies and the assets which would have otherwise gone into the Trust can be transferred to the surviving spouse. This should be done within 2 years of the death of the first spouse so that the transfer of the assets to the surviving spouse reinstates the Nil Rate Band allowance of the first spouse to die thus allowing the double Nil Rate Band allowance to become available to the surviving spouse (subject to the points raised above).
- If couples decide to rely on the double Nil Rate Band allowance, they should note that in light of the allowance being frozen they could qualify for a bigger increase in the allowance if you retain the Nil Rate Band Discretionary Trust which would be beneficial especially if the value of your property increases in the future.
- The Trust could also have an impact on the estates ability to claim the Residence Nil Rate Band Allowance which is in addition to the Nil Rate Band allowance of an individual and applies when the deceased leaves their main home (or the proceeds of it) to their linear descendants such as their children or grandchildren.