Should Nil Rate Band Trusts Still Exist?
Before October 2007, Nil Rate Band Trusts were a common and effective Inheritance Tax planning tool for married couples preparing Wills. However, things changed when the government introduced the Transferable Nil Rate Band and Nil Rate Band allowances were transferred over to a surviving spouse automatically. If you still have a Nil Rate Band Trust in your Will or you are a trustee in a Nil Rate Band Trust you may be wondering what you should do and whether there is still any benefit?
Nil Rate Band Trusts were added to Wills as a way of allowing married couples to utilise both their individual Nil Rate Band allowances (the amount they could pass onto their beneficiaries before having to pay Inheritance Tax). Without this Trust married couples were in danger of losing their own Nil Rate Band allowance if they decided to leave their estate entirely to their spouse on their death. Assets pass between spouses’ tax free, so, if the first of the couple to die passes everything to their surviving spouse they would also pass on the opportunity to utilise their own Nil Rate Band (as their surviving spouse would have inherited Inheritance Tax free anyway). In addition, the estate of the surviving spouse would have increased (after inheriting from their spouse) but their executors would still only be able to use the one Nil Rate Band available.
A Nil Rate Band Trust could prevent the loss of this Nil Rate Band. If the couple wrote Nil Rate Bands into their Wills a Trust would be created on the first death to provide for an amount up to the Nil Rate Band to be put in a discretionary Trust. This amount would pass into the Trust free of Inheritance Tax (because the deceased spouse was able to utilise their tax free amount) and the rest of their estate could then pass to the surviving spouse directly (again free of Inheritance Tax because of the spouse exemption). The intention of the Trust was to carve out the Nil Rate Band amount, still allow the spouse to benefit from these assets during their lifetime but to avoid their spouse inheriting this amount directly. Often (in order to reach the Nil Rate Band value) the Trust would contain the half share of the matrimonial home belonging to the deceased spouse, so it was important that the Trust was well written and a Letter of Wishes was drafted to protect the surviving spouse’s right to remain in the house during their lifetime.
In October 2007 the government changed the Inheritance Tax rules creating the Transferable Nil Rate Band. This now makes transfers of Nil Rate Band between spouses automatic. So, if the first of a couple dies leaving their estate to their spouse, they will also automatically leave them their available Nil Rate Band too. The combined Nil Rate Band amounts would then be available on the second death of the couple.
It seemed like this new legislation would make Nil Rate Band Trusts redundant and it is true that most of the Nil Rate Band Trusts were written for this purpose. However, there are still some benefits to Nil Rate Band Trusts which are worth remembering.
Nil Rate Band Trusts can still protect the assets inside them – If a Nil Rate Band Trust has been created the assets do not form part of the surviving spouses’ estate, although they will still be able to benefit from them. This means the assets won’t be considered in any means tested calculations or by any potential future creditors of the surviving spouse.
There are no Inheritance Tax disadvantages – If the Nil Rate Band allowance has been used by the deceased spouse in creating a Nil Rate Band Trust, it may not be available to the estate of the second spouse to die but the combined estates would be reduced by this amount so the estates would be no worse off.
The Trust can allow other people to benefit from the assets – As life moves on your spouse may wish to provide an advance of inheritance to beneficiaries. For example, to help a loved one with a house deposit. This could be done from the Trust (providing that they are listed as potential beneficiaries) so it doesn’t affect the tax affairs of the surviving spouse.
You can appoint Trustees to make decisions on managing the assets in Trust – At some point in the future it may be that other people will be better placed to look after the assets held in Trust rather than your surviving spouse, if your spouse ever has issues with their capacity in the future, for example. By appointing responsible and trustworthy personal and/or professional Trustees, you can be assured that the assets will be looked after, well managed and that the best decisions can be made for your beneficiaries.