Malcolm Gunn outlines why nil rate band Will trusts may still be useful in some cases.
Up until October 2007, it was viewed as de rigeur that Wills of a husband and wife should contain provisions for a nil rate band discretionary trust. However, when the transferable nil rate band was introduced with effect from 9 October 2007, it was thought that such trusts became superfluous. In fact, however, with the passage of time the general view is that these trusts still serve a useful purpose, albeit not quite the one which they served up to 2007.
Originally, the idea was to ensure that the nil rate bands of both husband and wife were fully used on the death of each of them. Without a nil rate band trust, if all the estate passed to the survivor, the nil rate band on the death of the first to die would go to waste. That is no longer the case, but now there are other good reasons for keeping the nil rate band trust in place.
Why keep it?
Firstly, there is often concern that the estate of the survivor should not be enhanced more than necessary so as to preserve assets overall in the event that his or her ill health declines and care home fees have to be incurred. So long as the nil rate band trust is set up under the terms of the Will of the first to die, it will be effective to preserve the assets in the trust from claims for payment of care fees. However, if the trust is set up under a deed of variation of the Will, this may not always be the case depending on the circumstances at the time when the variation is made.
The second good reason for keeping a nil rate band in place is that any hope of an increase in the inheritance tax nil rate band in the foreseeable future is a non- starter, whichever government wins the next election. Because of this, it may often be better to use the nil rate band on the first death in the expectation that the assets in that trust will grow in value outside the estate of the survivor. A frozen nil rate band for the foreseeable future is not an attractive proposition in relation to its transferability. Of course, in the more distant future perhaps the nil band may be substantially increased, in which case one might rue the day when it was decided to use it all up on the death of the first to die with a relatively small trust fund. Therefore it will be important to take stock about the nil band at the time of that death.
Points to consider
- It is important to frame the nil rate band trust carefully if the estate contains assets qualifying for 100% agricultural or business property relief. A decision will need to be taken as to whether these assets should go into the trust, as they will on the standard wording, or whether they should be directed away to some other beneficiary as a specific legacy. If the latter, the Will should be clear that the nil rate band trust does not include assets qualifying for 100% relief.
- Because nil rate band trusts can cause inordinate administrative work, including tax returns and separate investment advice, it was common to finance them with a charge on a property interest, which passed to the survivor. This remains a possible strategy, but an alternative to consider is to finance the trust with cash so far as possible which may be invested in a single premium life assurance bond. Historically, most advisors have not had a particular interest in these products, partly because of the charging structure for them and partly because of the track record of investment return. However, times have changed and they can be quite suited to a nil rate band trust since they produce no income or capital gain, funds can be released on a restricted basis free of tax and they can be assigned without any tax charge. An offshore bond has the advantage of a tax–free environment within the bond. Independent financial advice should be sought on such investments, and generally.
- Finally, including provisions for a nil rate band trust in a Will does not mean that it is set in stone as a burden forever more. After the death, the executors can, if everybody agrees, appoint the funds out to the surviving spouse absolutely within two years (but more than three months) of the death and the spouse exemption will then apply in full.
Practical Tip:
These trusts are very flexible and somewhat surprisingly still remain on the agenda for both inheritance tax planning and financial planning.
