Many of our clients will have established a Nil Rate Band Discretionary Trust under the terms of their Wills. The Nil Rate Band is the amount every individual can leave free of inheritance tax on death (currently £325,000).
The announcement in October 2007 that the Nil Rate Band for couples was doubling was disingenuous. It has not doubled and the changes made with effect from 9th October 2007 have no effect whatsoever on single people who have never been in a marriage nor in a civil partnership which has ended in death.
What has changed is a new flexibility in the use of Nil Rate Bands by allowing an effective transfer of any unused portion nil rate band to a surviving spouse or civil partner.
Whereas it used to be almost inevitable that we would advise couples in a marriage or civil partnership to include a Nil Rate Band Discretionary Trust in their Wills, it now needs more discussion as to whether it is suitable for each individual couple. However, to suggest that the Nil Rate Band Discretionary Trust no longer serves any useful purpose is quite wrong. Here are ten circumstances which suggest that it can still be advisable:
1. The law might change yet again, so that the flexibility afforded by a Nil Rate Band Discretionary Trust will enable your executors to act in the best interests of the family as a whole, both from a tax and a personal point of view.
2. Where a couple are young and have young children, they have to contemplate the possibility that a surviving spouse would remarry and have another family. They may wish to ensure that the Nil Rate Band is ring-fenced for the benefit of their own children in circumstances in which there is otherwise the possibility that none of their assets may be preserved for their own family.
2. Wealthy couples may be averse to making outright gifts on the first death. Their children may already be wealthy but their grandchildren are too young to benefit and so a trust of the Nil Rate Band for grandchildren may be attractive.
4. General discretionary trusts, if intended to run for many years, will benefit from the creation of a Nil Rate Band discretionary trust in the first Will. This is because the principal charge at 6% every ten years is levied on the amount on which the value of the trust exceeds the Nil Rate Band at that time. Two trusts are therefore better than one because there will be twice the nil rate band available.
5. A Trust allows income to be distributed to a wide variety of beneficiaries. If they are not higher rate tax payers, they can reclaim all or part of the income tax which has been paid by the Trustees on the income. This can result in a significantly lower level of income tax than would be payable by the surviving spouse on those assets if the Trust had not been established.
6. Agricultural or business property gives rise to tax saving opportunities. Such property put into a discretionary trust on the first death may be bought back by a surviving spouse and be tax free again in the estate of the second spouse to die. To put such assets into a Nil Rate Band trust also crystallises the 0% tax rate while still applicable as it cannot be guaranteed for the future.
7. Second marriages can make good use of trusts, in making sure that a Nil Rate Band is not wasted.
8. Care home fees continue to be a concern with an ageing population. Fees can amount to £50,000 per year. Whereas inheritance tax is levied at 40% on transfers over £325,000 in value, a person can be liable for every penny of care home costs if they have assets in excess of £23,500. Setting aside assets equal to the Nil Rate Band on the first death takes those assets out of the hands of the surviving spouse so that they would not be taken into account in assessing that spouse’s contribution to the costs of care.
9. If a property is jointly owned by husband and wife, then on the first death a share of the property can pass into a trust so that the property is owned by the surviving spouse and the trustees. On the later death of the surviving spouse, a discount on the value of their share will be allowed for inheritance tax purposes. The discount can be as high as 15% - whereas if the property were owned entirely by the surviving spouse no discount would be applied. At the second death the property is likely to pass to non-exempt beneficiaries such as children and so the discount could prove valuable.
10. A Nil Rate Band trust has its own capital gains tax allowance (albeit half that of an individual).
Your Will can be as straightforward or as complex as you would like it to be so please contact Clare Jeffries or any other member of Goodman Derrick LLP's Private Client Team on 0207 404 0606.
This guide is for general information and interest only and should not be relied upon as providing specific legal advice.
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