Does your Will contain a Discretionary Trust?

Before 9th October 2007, many people were advised to make Wills incorporating a nil-rate band discretionary trust to save inheritance tax.  However, because of legislation introducing the transferrable nil-rate band, in many circumstances the inclusion of such a complex trust in Wills is no longer necessary.

Inheritance tax (IHT) is generally charged at 40% on any sum by which a deceased’s estate exceeds £325,000 (the ‘nil rate band’) subject to the availability of exemptions and reliefs.  The most significant exemption is the ‘spouse exemption’ whereby gifts to a spouse are exempt from IHT provided the surviving spouse is domiciled in the United Kingdom.

Since 9th October 2007, it has been possible for spouses and civil partners to transfer to their surviving spouse or civil partner, for use on their death, any part of the inheritance tax nil-rate band allowance that was not used when the first spouse or civil partner died.

Where a valid claim to transfer an unused nil-rate band is made, the nil-rate band that is available when the surviving spouse or civil partner dies will be increased by the unused proportion of the nil-rate band on the first death.  For example, if at the time of the first death the nil-rate band was £300,000 and everything passed to the surviving spouse, then 100% of the nil-rate band will have been unused.  If the nil-rate band when the surviving spouse dies is £325,000, that would be increased by 100% to £650,000.

The amount of the nil-rate band that can be transferred does not depend on the value of the estate of the first spouse or civil partner to die.  Whatever proportion of the nil-rate band is unused on the first death is available for transfer to the surviving spouse or partner.

If your existing Will contains a nil-rate band discretionary trust then, by changing your Will now, you will be able to simplify your affairs and avoid the additional paperwork, complexity and costs that would arise in the event of your death.  You would also avoid a 3-month delay (from the date of your death) which would by necessity arise if the trust is to be dissolved and advantage taken of the new rules.

If you think your Will may contain a nil-rate band discretionary trust, or if you would like to discuss inheritance tax, please contact our Wills, Probate and Tax Planning team at: