Example 1 - First spouse to die
Joe Smith died and under
his will he left his whole estate (£500,000) to his wife, Helen.
Helen would inherit Joe’s
£500,000 without any charge to IHT.
Although no IHT charge arose on Joe’s death, effectively, Joe’s NRB has been wasted (i.e. it was simply not used).
Utilising the nil rate bands of both spouses
Although on Joe’s death no IHT was chargeable on his estate, on Helen’s death the IHT due will be exacerbated.
Example 2 - Second spouse to die
Assume on Helen’s death
her estate was £425,000. Together with the £500,000 inheritance from Joe, her
aggregate estate would be £925,000.
Deducting Helen’s NRB of
£325,000 leaves £600,000 subject to IHT at 40% i.e. £240,000.
However, the IHT charge on Joe’s death could still have been maintained at zero if he left £175,000 to Helen and the balance of £325,000 to someone other than Helen. On Helen’s death her IHT liability would then have been 40% of [[£425,000 + £175,000] - £325,000] i.e. £110,000.
So, by Joe utilising his NRB on his death the total IHT charge on the Smiths’ aggregate estate has been reduced from £240,000 to £110,000, an IHT saving of £130,000 (arising due to the IHT saved on utilising Joe’s NRB of £325,000).
How to utilise the nil rate band on first spouse death
Joe wants his wife, Helen, to inherit his estate on his death, but at the same time he wants to mitigate the family’s overall IHT liability.
The solution to achieve Joe’s twin objectives of utilising his NRB on death and yet still provide for Helen is for him to set up a nil rate band discretionary trust (NRBDT) in his will. Joe would transfer into the trust on his death assets from his estate equal to the NRB (i.e. £325,000), with the excess (after IHT) being left directly to Helen. Typically, the beneficiaries of the trust would be his wife, Helen, and their children (and/or other persons).
Post transferable nil rate band
The introduction of the TNRB in 2007 meant that it was no longer necessary for use to be made of a NRBDT in order not to waste the NRB of the first spouse to die.
Example 3 – Nil rate band transferred
Joe Smith died and under
his will he left his whole estate to his wife, Helen. Joe’s estate amounted to
£500,000. Helen would inherit Joe’s £500,000 without any charge to IHT.
On Helen’s death her
estate comprises her £425,000 plus the £500,000 from Joe’s estate.
However, using the TNRB facility,
the IHT liability on Helen’s death would be
40% of £275,000 (£925,000
less £650,000), i.e. £110,000.
Options
It is clear from the above that in the post-TNRB era Joe could either provide for a NRBDT under his will, or rely on the TNRB to achieve his objectives.
The decision needs to take into account not only the IHT exposure, but also other non-tax factors. Factors to be taken into account include:
- TNRB may not be around forever (i.e. perhaps don’t rely on it);
- NRBDT offers greater flexibility in the future (i.e. can take into account future circumstances);
- NRBDT offers protection of capital against care home costs (i.e. trust assets not available to be seized to pay such costs); and
- NRBDT is more IHT efficient if assets transferred into trust are likely to increase in value more than corresponding increases in the NRB; and
- NRBDT does involve some additional costs (i.e. professional fees).
If the NRBDT is not felt to be the better option it may be necessary to rewrite wills prepared before the TNRB era, in which a NRBDT may have been included.
Practical Tip:
For those in second marriages, the NRBDT may enable maximum NRBs to be claimed.
