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Topical Tips
105
November
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Every person has a nil rate band (NRB) that they can pass on at death that is
free of Inheritance Tax (IHT). The current NRB in 2007/08 is £300,000.
With certain specific exceptions the amount of the deceased’s estate in
excess of this NRB is subject to IHT at 40%. One key exemption is that assets
passed from one spouse to the surviving spouse on death are exempt from IHT.
However, those assets passed to the second spouse remain to be taxed as part of
the surviving spouse’s estate when they ultimately pass away. A problem
used to be that if the first spouse did not make use of their NRB and passed
all their assets to the survivor then, as a couple, their estate would only
benefit from the one NRB on the death of the second spouse – this would
cost an additional £120,000 IHT at current rates!
To mitigate or remove this problem, Will structures have been developed that
allowed the first spouse to create a NRB Discretionary Trust on their death and
pass to this Trust assets to the value of the NRB. The balance of the estate
would be given to the surviving spouse. This allowed the NRB to be used up on
first death and also the surviving spouse could be one of the potential
beneficiaries of the Trust and could access the assets if they required them
during their lifetime. Most usually the asset passed to the Trust would be a
loan note to the value of the NRB, which would be secured on the house that the
surviving spouse would inherit.
These Will structures did work, but as
Topical
Tips 99 described, they could go wrong if not set up correctly.
Additionally, only those couples who took the steps of having correct Wills
drawn up would benefit. For many whose combined estate exceeded the NRB the
failure to do the Will planning correctly resulted in a large
liability. |
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In his Pre Budget Report the Chancellor, Alistair Darling, made a change to IHT
to ensure that all married couples and registered civil partners will
automatically benefit from both of the couple’s NRBs without Will
planning. Under the new rule the unused proportion of the NRB on the first
death is passed onto the surviving spouse to use on their death. Importantly,
this new rule will be effective for couples where the first spouse has already
passed away. This is a major benefit to all widows and
widowers. |
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If you already have a Will with a Discretionary Trust structure in place then
don’t panic! You may not need to change your Wills. If you do not want to
use the NRB Trust on first death it can usually be broken within 2 years of
death and the survivor can still benefit from the 'double' NRB. The NRB trust
could still be useful, for example for assets that are going to increase in
value faster than the NRB. The Trust may also exist for other valid purposes
such as Double Dipping the value of business assets that benefit from Business
Property Relief – see
Topical Tips 6.
However you should not use the NRB Discretionary Trust in all circumstances
– there may be a pitfall that could cost your family IHT. For example, if
a spouse died today and used their old Wills to set up a NRB Discretionary
Trust then this would shelter £300,000 from IHT. If the second spouse
died, say after 2010, then the second spouse will use the current NRB value
(which will have grown to £350,000 by that date under the
government’s proposals) and therefore the IHT free part of the estate
would total £650,000. However if the first spouse did nothing and let the
new rules take effect then on the death of the second spouse the double NRB
that would be effective would be 2 x £350,000 and hence an extra
£50,000 would be passed on free of IHT. This £50,000 at 40% would
otherwise cost £20,000 in IHT under the old Will
structure. |
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Do not assume everything is fine
– take this opportunity to review your Will planning.
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Remember, you might still require
a Discretionary Trust for other reasons.
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Note that Wills that are not
tax-efficient can be rewritten with the consent of all the relevant
beneficiaries within two years of a death to correct this or other
problems.
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Take steps to understand your Will
and the terms within it.
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Consult your Barnes Roffe LLP
contact Partner for guidance in this important area.
Topical Tips is designed to be a
simple and useful source of ideas and information for clients and contacts of
Barnes Roffe LLP. If you are unsure about the implications of any idea
contained therein please contact your Barnes Roffe LLP partner. Barnes
Roffe LLP cannot take responsibility if the ideas are implemented without its
involvement. |
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