When meeting clients to discuss the preparation of new wills, or a review of existing wills if such be the case, and following the best principles of “Know Your Client”, I will always have a discussion with them about the extent of their wealth, keeping one eye on their inheritance tax situation.
If it becomes readily apparent that the estate (including gifts within the previous seven years) is less than £325,000 for an individual, or £650,000 for couple, then I can swiftly move on from considering inheritance tax principles and get on with preparing the Will that the client wants to make.
However, if it becomes clear that inheritance tax might be an issue, typically on the second death, but sometimes on the first, then it is worthwhile having a discussion along the lines of trying to quantify what the liability might be and, to a point, how that might be funded, although as some of my clients say “it’s not their problem!”
In the days before the introduction of the transferable nil rate band for inheritance tax purposes, traditional will planning would involve the use of a nil rate band discretionary trust to ensure that the full nil rate band available would be used on each death to maximise the exemptions. Since the introduction of the transferable nil rate band in the Finance Act 2008, this kind of will has been much less used, although there is still an argument that they have a use, particularly in terms of asset protection and helping to maximise the benefit from assets qualifying for Agricultural and Business Property Reliefs. Naturally there are many examples of the traditional planning still in place.
So, what is the best advice for clients who still have the traditional nil rate band discretionary trust will? Should they keep it or should they have a much simpler affair where everything simply passes to the surviving spouse on the first death? Ignoring non tax issues, then it is probably better to revise the will to leave everything to the surviving spouse (and wherever I use the expression spouse this does of course include civil partner). In straightforward cases, my thinking is that if the nil rate band were to increase in subsequent years then the available nil rate band on the second death increases appropriately, whereas if the nil rate has been used on the first death in its entirety then the benefit of future growth in the nil rate band has been lost.
It is worth noting that there are some practical steps to be taken on the death of the first spouse and documents to be filed away (probably with the Will of the surviving spouse) to facilitate claiming the unused nil rate band on the second death (currently using schedule IHT 402). In particular it is useful to have or to know:
– The date of death of the spouse who died first and their permanent address
– The date of marriage
– The place of marriage
– Did the spouse who died first leave a Will (and is a copy available)?
– What the net value of the estate passing on the first death was and if a grant of representation was obtained a copy – – should be procured for future use
– If available, a copy of any IHT return submitted on the first death would be useful
Commonly, when nil rate band discretionary trusts were used, the deceased’s half share of his or her dwelling would go into the trust and then down to the children on the second death. The problem here might be that this gives an issue for claiming the new residential nil rate band. The enhanced nil rate band (as some prefer to call it) was announced in the Summer Budget of 2015 and was the additional nil rate band to be made available when the deceased’s home was left to their direct descendants.
This new allowance is available from 6 April 2017 and increases over the four years to 2020 so that by the tax year 2020-21 the additional nil rate available is £175,000. A couple will then have between them £1 million worth of allowances. This additional band can only be used in respect of one residential property which has, at some point, been a residence of the deceased. It is quite clear however, that the enhanced nil rate band is not available for property being passed to a discretionary trust. What was once proactive IHT planning may now be costing the beneficiaries of your Will up to £140,000 in Inheritance Tax, so does your Will need revising?
To finish, it should be noted that if the value of the deceased’s estate is more than £2 million then the residential enhancement is tapered back to nil so that where the estate exceeds more than £2.2 million (2017/18) or £2.35 million (2020/21) there will be no residential enhancement.