08 June 2016

Lifetime Planning: Nil Rate Band Discretionary Trust Wills

Should we keep the Nil Rate Band Discretionary Trust Wills that we have or should we change them to take the full effect of the new Residence based Inheritance Tax allowance?

Question: Should we keep the Nil Rate Band Discretionary Trust Wills that we have or should we change them to take the full effect of the new Residence-based Inheritance Tax allowance?

There has been speculation as to whether, with the bringing in of the new Residence-based IHT Tax allowance (Potentially worth a further £350,000 of inheritance tax shelter for married couples dying after 2020 with assets in excess of £1million but less than £2million with surviving children or grandchildren) couples should be making new Wills to benefit from this new tax exemption.

The answer is prosaic; for some it may be appropriate for them to make new Wills but for many others it may be best to play the ‘wait and see’ card.

It is true that on the first death out of a married couple having such Discretionary Trust type Wills in place, that there will be no transfer claim available for the children to use on the survivor’s death and so the non-survivor’s Residence-based Nil Rate Band allowance could be effectively wasted. This is because it can only be used to benefit direct lineal descendants.

A Discretionary Trust does not take up that relief and so the non-survivor’s Residence-based allowance is not available later on. Accordingly this would expose £175,000 worth of asset value to inheritance tax on the survivor’s death leading to an extra £70,000 worth of inheritance tax being encountered.

Before rushing to change your Will, it is worth noting that any Nil Rate Band arrangement can always be “turned off” on the event of the first death to happen out of a married couple by means of an appointment under Section 144 to the surviving spouse of their spouse’s assets. One of the reasons for doing this may be to fully access the new Residence-based allowance.

There could be reasons why keeping the Nil Rate Band structure may be more appropriate for the circumstances of a particular family and it is a decision which can be adequately left until the first death happens.

Edward Walter

Edward Walter
Partner