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Nil Rate Band DT Wills vs. Straight Forward Wills by Bryan Dean 09/11/2008

Prior to 9 October 2007 the Inheritance Tax (IHT) position for spouses and civil partners was straightforward:-

If you left everything to each other, on the first death no IHT was payable, but there was no carry forward of the unused nil rate band of the first to die, so, on the death of the second spouse, there was only one nil rate band.
Many people incorporated nil rate band discretionary trusts in their Wills, so that, on the death of the first of a couple to die, the nil rate band allowance was used.

The Finance Act has now become law and, when the second spouse or civil partner dies, the executors not merely have that person's nil rate band, but can claim and increase the IHT allowance by adding any unused proportion of the nil rate band of the first to die.

The death of the surviving spouse must be on or after 9 October 2007, but also the first spouse/civil partner must not have died before March 1972, as prior to then there was no spouse exemption.

Clearly, a proportion of the population will now opt to alter their Wills, so that the first to die leaves everything to the other, as this is the most straightforward option.

However, the nil rate band discretionary trusts are still very useful for IHT planning if the first to die owns a business, or agricultural property.

Nil rate band discretionary trusts may be retained in Wills for other practical reasons, as follows:-

The surviving spouse/partner may spend all the money on nursing home fees, or go bankrupt.
The surviving spouse/partner may give all the money away to other beneficiaries.
The surviving spouse/partner may remarry and leave all the estate to the new spouse.
The surviving spouse/partner may sell the deceased's business or agricultural property, so that there is no business property or agricultural relief on the second death.

Clearly, discretionary trusts are quite complex and do require legal work on the first death in order to be implemented. There is then an ongoing need to run the trust properly, in order to satisfy HM Revenue and Customs, on the second death, that it was a “bona fide” or proper trust, rather than a sham. Nil rate band discretionary trusts therefore remain appropriate in many cases, though the legislation does trigger a need to review the position.
Please contact myself, or one of my colleagues, Richard Butler, Richard Hemmingway or Michael Derrick, for a thorough review.