Wednesday 15 February 2012

Wills and Inheritance Tax (IHT)

Most of us tend to put off making financial decisions about wills and IHT . It is both difficult to think about and a complicated area. While the following pointers should help you make financial decisions linked to wills and inheritance tax, you should seek professional independent advice if you are dealing with large sums of money. 


Although it affects relatively few people, about £1.1 billion too much inheritance tax is paid each year. HMRC figures suggest an estimated 1.1 million people share inheritances of about £25 billion, with about £1.4 billion going to the tax office much of which could be avoided. 


Each year about 53,000 people will die "intestate", meaning without having made a will. If you have no living relatives, or these cannot be traced, the money will go to the government.


GUIDE TO WILLS 


Who can make a will? Anyone aged over 18 of sound mind. 


Why should you make a will? A will lets those left behind know how you want your assets distributed. You need to make a will so you can ensure that your estate - which includes property, savings and possessions - is handed down to the beneficiaries of your choice. 


 If you die without making a will, there could be unpleasant legal wrangles and any money or property will be distributed according to the laws of intestacy. This does not recognise unmarried partners and, what's more, in cases of large legacies, a spouse does not automatically inherit everything.


How to make a will Many people see a solicitor to make a will. This will mean you benefit from experience. But a consultation costs - typically about £75 for a 15-minute consultation, which should be enough time, in most cases, to get the job done. Some banks also offer help with making a will. 


Can you do it yourself? Yes, kits for writing wills are available from shops such as WH Smith for about £10. You can also do an online will. 


Who else needs to be involved? You will need to appoint executors, who are, typically, family members or lawyers. 


A will needs to be witnessed by two people who are not beneficiaries. 


How often should a will be updated? As your circumstances change, your will may need to be updated or altered. For example, if you marry and have children you may need to consider that, if you have children under 18, money should be left in trust for them. 


Where should a will be kept? A will should be viewed as a valuable item and be kept in a safe place, such as a bank safe deposit box. Copies are worthless and you should be aware of this if you ever need to send a will in the post, as only the original is recognised legally. 


GUIDE TO INHERITANCE TAX There are three main taxes that affect most people:

  • income,
  • capital gains and 
  • inheritance. 
The good news is that most people don't pay inheritance tax and HMRC states that 96% of estates avoid it. But it is an area that is now concerning far more people largely because of rising property prices in recent years. Many people, particularly in the south of England, now own valuable homes, and their total assets exceed the inheritance tax threshold.


Many people manage to avoid inheritance tax, however, either through good planning or through leaving assets to their spouse (which means it is not payable). 


What if I leave everything to my husband or wife? 


No inheritance tax is payable, but you must both be domiciled in the UK.


What's the inheritance tax threshold? This is £325,000 and, if you are liable for the tax, it will be levied at 40%. The sum-up to £325,000 is known as the nil-rate band. 


What deductions are made? Bequests to a spouse and UK charities are exempt, and outstanding bills, together with funeral costs, will also be deducted from the inheritance tax amount outstanding. 


Who pays the tax office? This will be paid by personal representatives. 


In some cases, children or heirs can find themselves having to pay the tax bill out of their own funds. Some people find themselves forced to take out bridging loans to meet tax liabilities because they are in the process of disposing of assets, which is why planning before you die can be very helpful.  


When is money owed for inheritance tax payable? It needs to be paid six months after the end of the month when the person has died. The authority to release the money held in the estate is known as probate in England and Wales and confirmation in Scotland. 


How can I avoid paying inheritance tax through gifts? The crucial issue with making gifts to below the inheritance threshold is that they are made seven years before you die - it is, in a sense, a clock ticking when you can beat the tax office. 


What are the rules concerning gifts? Although gifts made in the seven years before your death can be subject to inheritance tax, a number are exempt from tax.


A list of these can be found in "An Introduction to Inheritance Tax", a leaflet available from HMRC.


These gifts include: 

  • sums of money of up to £5,000 given as wedding gifts to children; and
  • maintenance payments to ex-partners and children; and
  • other gifts of up to £3,000 made during a tax year. 



Everyone has this £3,000 limit and, if it's not used up in one year, the amount can be carried forward to the next. 


In addition,small gifts of up to £250 can be made to any number of people.


 After three years, the tax payable on a gift starts reducing until it reaches nil at year seven. This is known as taper relief. 


The situation concerning gifts can be complicated and, again, it is an area where many people will want to seek advice from an experienced financial adviser. 


What are "potentially exempt transfers"? It is just another term used for gifts made within the seven-year period to friends and relatives. 


If you die within the seven years, the value is added to your estate; if you don't, then the gift is exempt. 


You do not have to tell the tax office about gifts you have made, but the recipient is required to report the gift within a year of the donor's death. 


If the death is within three years, 40% is charged; after this, a sliding scale is applied. 


This is equivalent to a reduction of a fifth if the gift was made between three and four years before your death; another fifth if between four and five years; and so on, until the seventh year. 


What are chargeable transfers? Although there is no inheritance tax charged on a gift made seven years before you die, chargeable transfers can incur tax. These are sums of money transferred typically to trusts for which tax payable at 20% is normally levied on the excess above £325,000. These can also be known as discretionary trusts, which are administered by trustees and where the individual may have no immediate right to income. Gifts to companies are also known as chargeable transfers. 


What about giving away a property? Giving away your home to children or relatives will not mean you are automatically exempt from inheritance tax. If you plan to keep living in it, you need to prove you are paying the new landlord the correct market rent. The landlord could also face a capital gain tax bill when the property is sold and the inheritance tax sum owned if you die within seven years of making the gift.


What about insurance policies? Many people have life insurance and if you die and the proceeds are paid into your estate, this money could be subject to inheritance tax if it exceeds the £325,000 limit. 


The way around this is to have the policy within a trust. Pension fund proceeds passed on to a spouse will also be free of tax. 


What about gifts to charity? Anything left to a UK charity is free of inheritance tax and this also applies to political parties and housing associations. 


What about a trust to avoid inheritance tax? Trusts are a good way of avoiding or paying less inheritance tax and a financial adviser can assist with setting these up. They are not necessarily a total escape from tax though - dependants may still face a tax bill, although at a far lower rate than 20%.


Financial products are held within trusts and are typically provided by insurance companies. It is worth noting that some have higher charges than others. You will need advice on how to set these up. 


These are best viewed as a way of giving away ownership of money, but still retaining some measure of control. 


If you do not set up a trust, although you can transfer assets to a spouse tax-free, when they die and pass on wealth to the next generation, inheritance tax will be payable on everything beyond their £325,000 limit. 


Life insurance can be written in trust. This applies mainly to whole of life policies. In the case of married couples, for example, a policy would be written on both lives, which pays a death benefit on the second death - when inheritance tax would arise. 


You can also buy a policy called a "gift inter vivos" - meaning a gift between two living people - which is also written within a trust. This is a temporary type of cover, aimed at meeting an inheritance tax liability if you die within seven years of making a lifetime gift. The death benefit will reduce as the potential tax liability reduces. 


LIVING ABROAD AND INHERITANCE TAX A growing number of people choose to retire in the sun, for example by moving to Spain or Cyprus. Some mistakenly believe they have escaped the clutches of HMRC by moving abroad. Although this means they no longer have to pay income or capital gains tax, they remain liable for inheritance tax.


Many people fail to understand the implications of going abroad. Just because you change your residence, it does not mean you change your domicile, which, in the case of many people, remains the UK. 


Domicile, as opposed to residence, is a harder concept to define and is linked to "ultimate association". In some cases, it is possible to change your domicile and so avoid tax, but this is rare as it involves convincing HMRC that you have permanently severed all your ties with the UK and many people return to the UK before they die. If you are considering moving abroad, you should seek advice without delay on how to tackle potential inheritance tax problems. Some people could face a double whammy in tax bills - a charge from the UK and also from the foreign or European country where they were living. This does not apply to those who die in the UK. 


Married women and property Every year there are cases where husbands die and the wife presumes the property will automatically pass to her. But this only happens automatically if a property is registered in both names.


With older people, particularly, a home may be registered only in the name of the husband. If this is the case, there needs to be a grant of probate to dispose of the property and it then needs to be re-registered in the name of the surviving spouse. This needs to be done with the Land Registry, takes several months and also incurs a cost. If you are a married woman and have been living in a property for many years, it is worth checking you are registered as a joint owner. An unmarried woman living with a man may have no right to a property if no will is made and she is not a joint owner. 


CHECKLIST TO HELP WITH WILLS AND INHERITANCE TAX 
• Work out the full value of your assets so you can plan how to avoid inheritance tax in plenty of time.
• Make a will. 
• Check company benefits. Most employers pay a death in service benefit to the dependants of employees. It could be more tax efficient to ask an employer to pass this money on directly to children. If not, it will be passed on to the spouse's estate and become taxable when they die. 
•· Don't forget to help your favourite charities. 
• Remember the seven-year rule when it comes to making gifts. If you survive for seven years after making a gift, inheritance tax is not payable. 
• Remember the £3,000 allowance for making gifts in a tax year. This allowance, if not used, can also be carried forward for one year. 
• If children marry, they can receive up to £5,000 from parents and £2,000 from grandparents. Anyone else can give £1,000. 
• There is information available on HMRC's website at www.hmrc.gov.uk and this also has details of help lines, where more assistance can be given. 
• Your local Citizens' Advice Bureau should also be able to help with will and inheritance tax issues. 
• Remember, some financial advisers will charge fees and others earn commission on the products they sell. 


Bearing in mind you are likely to want advice and may not decide to buy any financial products, you may obtain better guidance if you are prepared to pay a fee.

Tuesday 7 February 2012

Make a will...NOW!


Make a will
One in three of us will die without making a will, says the Law Society, usually because we assume everything will go to our spouse. If there is no will, it doesn't, which means anything you leave to other people could still be taxed.

It is also useful to keep records of the values and dates of any gifts of cash or assets you make.
You don't need stacks of paperwork – just dedicate a drawer in a filing cabinet or keep a document on your computer. People should make the effort to die tidily. It is an onerous job to be an executor, and if a family member or friend has undertaken this for you, the least you can do is make their job a bit easier.
Make cash gifts
Gifts made more than seven years before you die are free of IHT, as long as you don't retain any benefit, such as continuing to live in a house you have given away. 


Everyone has a set of small annual gift allowances, too.The earlier you start planning, the more options are open to you. Everyone is entitled to gift away £3,000 a year – which will be exempt from IHT – and spouses have separate allowances meaning a couple can offload £6,000 in each tax year. Gifting can be an extremely effective IHT planning tool but only if you begin early. Leaving it too late reduces the options and may force you to take more drastic remedial action.
You may give up to £5,000 to each of your children when they marry and any number of gifts up to £250 may be made. Regular gifts from income, which do not reduce your standard of living, are also exempt.
Tidy up life policies
Write any life insurance policies you have into trust to make sure they are paid out free of IHT after your death. While pension policy providers usually set up pension funds in trust automatically, you have to ask for this to be done by life insurance providers. Most insurers have standard documentation.
Discretionary will trusts
Married couples automatically combine their IHT allowances on the death of the first person. When the second member of the couple dies, twice the nil-rate band at that time is applied to the remaining estate (£650,000 this year). This has removed some of the benefit of discretionary will trusts, under which couples used to transfer assets up to the value of the nil-rate band into trust in order to use up both allowances on the death of the second person.
However, they can still be useful. Nursing home or residential home fees, that might be payable by a surviving spouse if they went into care, could be avoided by not allowing all the assets to pass to them when the first spouse to die does so.
Assets held in a discretionary will trust are ring-fenced from the local authority means test, which means they are not taken into account when assessing whether somebody receiving long-term care must pay some or all of its costs.
Use trusts
Discretionary trusts enable you to retain control over assets you give. The assets you place within them become free of IHT after seven years, but you retain the right to take those assets back if you need them in the future.
However, many of the benefits of trusts have been eroded since the 2006 Budget, in which the Government announced new taxes on such trusts.
Loan trusts enable you to "lend" money to a trust and receive tax-free repayments of, usually, five per cent per year, although you do not have to take repayments. Any capital growth is also deemed to be outside your estate for IHT purposes.
Discounted gift trusts allow you to retain income from a portion of your capital, while gifting the other portion. The benefit is that the portion you are taking income from is immediately free from IHT, while the rest becomes free of IHT after seven years.

Tuesday 24 January 2012

IHT on contributions to Employee Benefit Trusts






Here I set out HM Revenue & Customs (HMRC) current view on the Inheritance Tax position in relation to contributions to an Employee Benefit Trust (EBT). 


Although the same principles apply where an individual makes a contribution to an Employee Benefit Trust the main thrust here is aimed at the more common situation where the contribution is made by a close company as defined in s102(1). 


All statutory references are to Inheritance Tax Act 1984 (IHTA)  unless otherwise stated.


Employee Benefit Trust within S86


I assume the Employee Benefit Trust satisfies the provisions of s86 that is, essentially the trust is one where the funds are held at the trustees’ discretion to be applied for the benefit of 'all or most of the persons employed by or holding office with the body concerned' (s86(3)(a)).


Impact of S13 on whether the contribution is a transfer of value


The effect of s13 is that an Inheritance Tax charge arises under s94 on contributions to an Employee Benefit Trust made by a close company where:



  • the contribution is to an Employee Benefit Trust which satisfies s86
  • the participators (as defined in s102(1)) in that company and any person connected with them are not excluded from benefit under the terms of the Employee Benefit Trust (so that s13(2) disapplies s13(1)) and
  • the contributions are not allowable in computing the company’s profits for Corporation Tax purposes (s12) and/or it is not shown for the purposes of s10 that the contributions are made in arms-length transactions not intended to confer a gratuitous benefit.



Participators excluded from benefit


Where the trust deed specifically purports to exclude the participators from benefit but nevertheless the participators do benefit in fact for example:
  • by payment to them of loans or
  • by assigning funds from the Employee Benefit Trust on sub-trusts for their benefit and that of their family

then HMRC take the view that s13(2) disapplies s13(1) and the Inheritance Tax charge under s94 arises because the funds have been applied for the benefit of the participators.


Impact of MacDonald (HMIT) v Dextra ('Dextra')


This decision applies to contributions made before 27 November 2002.


In a unanimous verdict, the House of Lords upheld the decision of the Court of Appeal in favour of the Inland Revenue in the case of Macdonald (HMIT) v Dextra Accessories Ltd & Others.


What were the facts?


Dextra Accessories Ltd and five other group companies made contributions to an Employee Benefit Trust (EBT), set up by the holding company of the group. They deducted these contributions in computing their taxable profits for the accounting period in which the contributions were made.


The trust deed gave the trustee wide discretion to pay money and other benefits to beneficiaries and a power to lend them money. The potential beneficiaries of the trust included past, present and future employees and officers of the participating companies in the Dextra group, and their close relatives and dependants.


The trustee did not make payments of emoluments out of the funds in the EBT during the periods concerned, instead the trustee made loans to various individuals who were beneficiaries under the terms of the EBT.


What was the point at issue?


The question was whether the companies’ contributions to the EBT were “potential emoluments” within the meaning of section 43(11)(a) Finance Act 1989, being amounts “held by an intermediary, with a view to their becoming relevant emoluments”.


What was the decision?


The House of Lords held that the contributions by the companies to the EBT were potential emoluments within section 43(11)(a) as there was a "realistic possibility" that the trustee would use the trust funds to pay emoluments. The Court of Appeal, agreeing with the High Court, had said that it was "rightly accepted" that the trustee was an intermediary. “With a view to” did not mean the sole purpose (as the Special Commissioners had held) or the principal or dominant purpose (as the High Court had held).


This meant that the companies’ deductions were restricted. 


The companies could only have a deduction up to the amount of emoluments paid by the trustee within nine months of the end of the period of account for which the deduction would otherwise be due. Relief for the amount disallowed will be given in later periods of account in which emoluments are paid.


Is the case of wider interest?


The case is of wider importance as contributions to EBTs have been a feature of a number of marketed tax avoidance schemes. The treatment set out below sets out the HMRC view of when relief is available, in light of this decision, for contributions to EBTs before the introduction of Schedule 24 Finance Act 2003.


What EBTs will be affected?


The decision applies to all EBTs where there is a "realistic possibility" under the terms of the trust deed that funds will be used to pay emoluments, however wide the discretion given to the trustees.


It does not apply to contributions made on or after 27/11/2002, which would otherwise be deductible for periods ending on or after that date. Relief for these is governed by Schedule 24 Finance Act 2003.


What are emoluments?


HMRC accept that the term "emoluments" for the purposes of section 43 is wider than just taxable emoluments. It includes money and other benefits convertible into money, even if there is no tax charge at that time the payments are made by the trustees, for example as a result of a statutory exemption.


A loan to a beneficiary is not an emolument. It is simply an investment made by the EBT. At some point the loan will have to be repaid and the money will then be available to the trustee to disburse in line with the terms of the trust (which is likely to be in the form of emoluments).


Will this cause anomalies?


In his judgement Lord Hoffman accepted that this interpretation could lead to some employers never obtaining relief. He went on to agree with the comments of Jonathan Parker LJ in the Court of Appeal, saying that "it is the result of an arrangement into which the taxpayers have chosen to enter."


What will HMRC be doing?


The Anti-Avoidance Group has set up a team to project manage these other cases to ensure that the tax outstanding is collected systematically and consistently.


In appropriate cases, HMRC will be issuing closure notices in cases under enquiry, disallowing contributions where emoluments have not been paid.


Updated Guidance:


HMRC will be reviewing the guidance in the Business Income Manual on EBTs and other areas affected by section 43 Finance Act 1989. Where appropriate, the guidance will be updated to reflect the decision in this case.


Implications for Inheritance Tax (IHT)


Where the company making the contributions to an EBT is a close company, the outcome of this litigation is likely to have implications for IHT.


The effect of section 13 Inheritance Tax Act 1984 (IHTA) is that an IHT charge under section 94 IHTA on transfers of capital by a close company will arise where:


a close company transfers capital to an EBT which satisfies s86IHTA;



  • the participators in that company are not excluded from benefit under the EBT, and
  • the contributions are not allowable in terms of section 12 IHTA in computing its profits for CT purposes.



In these circumstances the transfers of capital by the company will be transfers of value for IHT purposes.


In terms of section 94 IHTA, HMRC then look through the close company and apportion the transfer of value between the participators "according to their respective rights and interests in the company immediately before the transfer". 


Any IHT charge therefore falls on the participators as individuals and will be at the current lifetime tax rate of 20% rising to 40% in the event that the participator dies within 3 years of the transfer (section 7 IHTA).






In that case, the trust deed gave the trustee wide discretion to pay money and other benefits to beneficiaries and power to lend them money. The potential beneficiaries of the trust included past present and future employees and officers of the participating companies in the Dextra group and their close relatives and dependants. The trustee did not make payments of emoluments out of the funds in the Employee Benefit Trust during the periods concerned, instead the trustee made loans to various individuals who were beneficiaries under the terms of the Employee Benefit Trust.


The point at issue was whether the company's contributions to the Employee Benefit Trust were 'potential emoluments' within the meaning of s43(11)(a) FA1989 being amounts 'held by an intermediary with a view to their becoming relevant emoluments'.


The House of Lords held that the contributions by the company to the Employee Benefit Trust were potential emoluments as there was a 'realistic possibility' that the trustee would use the trust funds to pay emoluments. This meant that the company's deductions were restricted. The company could only have a deduction for the amount of emoluments paid by the trustee within nine months of the end of the period of account for which the deduction would otherwise be due. Instead relief for the amount disallowed would be given in the period of accounting in which emoluments were paid.


Sch 24 FA 2003


This statute applies to contributions made after 27 November 2002.


S143 and Schedule 24 Finance Act 2003 prevents a deduction for Corporation Tax purposes until the contribution made for employee benefits is spent by a payment that has been subjected to both PAYE and National Insurance contributions. Thus the position already established in Dextra is therefore effectively formalised by legislation for events on or after 27 November 2002.


Dispositions allowable in computing profits for Corporation Tax purposes - S12
HMRC take the view that there is nothing in s12 that enables its relieving effect to be given provisionally while waiting to see whether the contribution will become allowable for Corporation Tax purposes.


A deduction in the Corporation Tax accounts can be permanently disallowed by the following:



  • capital expenditure disallowed by s74(1)(f)ICTA1988.
  • expenditure not wholly and exclusively incurred by s74(1)(a)ICTA

Also the timing of a deduction can be deferred to a later period by the following:



  • generally accepted accounting practice (UITF13 and UITF32) which capitalises Employee Benefit Trust contributions by showing them as an asset on the company's balance sheet until and to the extent that the assets transferred to the intermediary vest unconditionally in identified beneficiaries
  • expenditure subject to s43 FA89 that is, the Dextra decision - see above
  • and post 27 November 2002 expenditure subject to Sch 24 FA 2003 - see above

It is HMRC’s view that if expenditure is not allowable for any of these reasons then relief under s12 is not available. The effect of this for Inheritance Tax purposes is that the contribution to the Employee Benefit Trust is a chargeable transfer under s94, assuming that participators are not excluded from benefit (s.13(2))


Relief from the Inheritance Tax charge is only available under s12(1)IHTA to the extent that a deduction is allowable to the company for the tax year in which the contribution is made.


IHT provisions on due date for tax and interest


Where, on HMRC’s view of the matter, a charge to Inheritance Tax arises under s.94, any tax payable is due six months after the end of the month in which the contribution is made or at the end of April in the year following a contribution made between 6 April and 30 September inclusive. Interest is charged on any unpaid tax from the due date.


Does s10 IHTA provide protection from the Inheritance Tax charge?


The s10 test is a stringent one and in the view of HMRC it must be shown inter alia that there was no intent to confer any gratuitous benefit on any person. The possibility of the slightest benefit suffices to infringe the requirement.


HMRC note that



  • by its very nature an Employee Benefit Trust is a discretionary trust
  • to satisfy the conditions of s86 the trustees' absolute discretion must remain unfettered
  • the potential 'beneficiaries' normally include the participators themselves, former employees and the wives husbands widows widowers and children and step children under the age of 18 of such employees and former employees
  • contributions to an Employee Benefit Trust will often confer a gratuitous benefit on the participators

In these circumstances, HMRC think it will normally be difficult to show that s10 is satisfied at the date the contributions were made to the trust. HMRC take the view that it is the possibility of gratuitous intent at the date the contribution is made that we have to consider.


Charge on participators under S94


Where a disposition is not prevented by s13 from being a transfer of value, a charge arises under s94 and the transfer of value is apportioned between the individual participators according to their respective rights and interest in the company immediately before the contribution to the Employee Benefit Trust giving rise to the transfer of value.


Summary


This sets out HMRC’s current view. Pending the resolution of any legal challenge to this view, existing cases will be pursued by HMRC on this basis.

IHT transferable nil rate band


When one spouse or civil partner dies before the other and part or all of their nil rate band is unused at that time (usually because all the assets of the first spouse or civil partner pass tax free to the surviving spouse or civil partner), any unused nil rate band can be carried forward and added to the nil rate band of the survivor.

As there may be a considerable time between the death of the first spouse or civil partner it may be difficult to prove what if any nil rate band has been transferred.
HMRC will require details of the IHT history of first death in order to agree any claim made on the second death.
Details to keep after the first death:
The following are a list of documents and records that should be retained where there is a transferable nil rate band available following the first death of a member of a couple or civil partnership.
  • A copy of the IHT forms or full written details of the assets in the estate and their values
  • Death certificate
  • Marriage or civil partnership certificate
  • Copy of the grant of representation (‘confirmation’ in Scotland)
  • A copy of the will (if there was one)
  • A note on how the estate was passed (if there was no will)
  • A copy of the deed of variation or other similar document
  • Any valuations of assets that pass under the will or intestacy other than to the surviving spouse or civil partner
  • The value of any other assets that also passed on the death of the first spouse or civil partner, for example, jointly owned assets, assets held in trust and gifts made in the seven years prior to death
  • Any evidence to support the availability of relief (such as agricultural or business property relief) where the relievable assets pass to someone other than to the surviving spouse or civil partner
Keep these documents with your own will, if possible
.

Any tax breaks from Nil rate band trusts?

In 2007 the Inheritance Tax (IHT) rules were changed making nil-rate band trusts (NRBT) less advantageous. If your will still includes one, should you change it to remove the trust or does it still have some tax advantages?

Outdated clauses For a long time NRBTs were considered an essential IHT planning tool for married couples. After one spouse died, they allowed the survivor to use the assets of the deceased, including any income they yielded, without them being treated as part of their estate for IHT. 

In 2007 the IHT rules were changed to allow a similar result to be achieved by different means but more easily: any unused nil-rate band of the first spouse to die can now be added to  the survivor's to increase the value of the estate escaping IHT. Many couples have now changed their wills to remove NRBTs. Is this a good move?

Saving time and costs Deleting an NRBT clause from a will means there is no trust to administer during the life of the remaining spouse saving on administration and tax return preparation costs. This appears to be a good enough reason for getting rid of the clause but there is no need to spend money on lawyer's bills for drawing up new wills yet.

Tip Gather your beneficiaries around, explain to them that you still have NRBT in your will but they, and your surviving spouse, can  decide whether it is worth keeping after you've gone. If they decide to get rid of it, they can sign a deed of variation abolishing the trust.

Trap If the beneficiaries include someone incapable of signing away their rights eg a minor, a deed of variation may not be possible unless the NRBT includes an option to distribute (appoint) the trust to one of the named beneficiaries. This has the effect that that the trust can be reversed by the trustees transferring all its assets to the surviving spouse within two years of the death of the first spouse. So what advantages does a NRBT have?

Having it every way With a NRBT you can hedge your bets. It may not be helpful in your present situation but your personal and financial situation may change as may that of your spouse. If you have a NRBT, leave it alone. It may even offer IHT or other financial benefits:

1) Where the growth in asset values in the trust exceeds the increase in the nil-rate band; (Remember the nil-rate band has been frozen for five years.)

Example - part 1
Wilf died in 2006  leaving an estate worth £500,000. He left everything to his wife Mary. Transfers between spouses of the same domicile are IHT-exempt, so no tax was payable on his death. It also means that John's £300,000 NRB was unused. When Mary died in June 2007 her estate, which of course included most of John's wealth, was worth £700,000. After knocking off her NRB of £312,000 it left £388,000 taxable at 40%, i.e. £155,500 due to the HMRC.
Example - part 2
Had Wilf transferred £300,000 into a discretionary trust of which Mary was a beneficiary, and the balance of his estate (£200,000) directly to her, there would still have been no IHT to pay (see calculation below). The difference is that when Mary died her estate would be taxed on much less than in the first example because HMRC ignore money in an NRB trust. If her estate was worth £400,000, with the NRB at £312,000, this leaves £88,000, on which the IHT would be £35,200.


Wilf’s estate at death £500,000
Less: gift to his spouse Mary £200,000
Net estate for IHT (2007) £300,000
Nil-rate band £300,000


2) If you have been married more than once particularly where you have children from a previous marriage.

It can be tax advantageous to include a provision in your will for an NRBT where you have been married more than once.

Example


Wilf and Mary marry in 1978 and have a son in 1982. In 1988 Wilf dies. His estate is valued at £400,000 which he leaves  entirely to Mary. Under the inter spouse gift exemption rule, no IHT is payable on his estate leaving his nil rate band unused.

Some years later Mary marries Xerxes and they have two daughters. Xerxes dies in 2006 leaving all his estate, worth £850,000 to Mary. Again the inter spouse exemption applies to ensure no IHT was payable on this. Therefore Xerxes’s nil rate band is unused.

When Mary dies in 2011 her executors claim the unused nil rate band from previous marriages, but this is limited to 100% of the nil rate band at the time of her death, i.e. £325,000. Her estate is entitled to this plus her own nil rate band of £325,000, meaning that overall £650,000 of her estate was IHT-free.

Had Wilf and Xerxes both set up NRBTs in their wills for their children and Mary more of their estates would have been IHT-free: 

Nil rate band when Wilf died      £110,000
Nil rate band when Xerxes died £275,000
Combined IHT-free amount       £385,000

Plus
Marys nil rate band                   £325,000

Total nilrate bands used           £710,000  

3) To protect the matrimonial home from local authority charges should your spouse need to go into a nursing home.