Outdated clauses For a long time NRBTs were considered an essential IHT planning tool for married couples.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
Mary’s
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.
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