Transferable nil rate band vs Nil rate band discretionary trust

 In Trusts, Wills

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balance - discretionary trusts

There is now a balance to be struck in deciding whether to include a nil rate band discretionary trust in a Will or to rely instead in the transferable nil rate band. There are still advantages to a nil rate band discretionary trust which are considered briefly below.

In many cases the transferable nil rate band will mean that no special attention needs to be given to creating a nil rate band legacy, or a nil rate band discretionary trust (“an NRB Trust”). There are still some advantages to the NRB Trust in particular which should not be overlooked.

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Non-tax considerations

An NRB trust is still an effective means of shielding assets from the local authority charge in respect of residential care for the elderly. A legacy to the children may be simply what the testator wishes to do.

Appreciating assets

The assets of an NRB Trust may appreciate in value. The growth may outstrip the increase in the nil rate band between the death of the first to die and the second to die. To that extent an NRB Trust may prove to be more tax advantageous than taking advantage of the new transferable nil rate band.

The nil rate band is £325,000 from April 09 and will increase to £350,000 in April 11. If the first to die died on 7 April 07 leaving an NRB Trust of £300,000 which the executors immediately constituted, the trust assets would need to grow at about 4.5% per annum net to beat the increase in the NRB, although if the second to die died towards the end of the tax year 3.5% would probably be sufficient.

Not much downside

If an NRB Trust is created, it will always be possible to reconsider after the death of the first to die. An appointment to the survivor between 3 months and 2 years from the date of death of the first to die will be read back into the first to die’s Will under s.144 IHTA 1984. There is a trap for absolute appointments (but not appointments which qualify as IPDIs) which are made within 3 months as section 144 will not apply to such appointments– IRC v Frankland). If the trap is avoided, an absolute appointment or an IPDI to the survivor will attract the spouse exemption and the first to die’s nil rate band will be unused – the survivor will get a 100% increase to his or her nil rate band on his or her death.

Widows and Widowers who have remarried

An NRB Trust may be desirable when dealing with the wills of remarried widows and widowers and their new spouses. Consider this example. Arthur died on 14 April 2007 with an estate of £450,000, leaving it all to his widow Bertha. Arthur’s nil rate band was £300,000, and is unused. Bertha has now remarried Elgar.

  1. Bertha dies before Elgar when the nil rate band is £325,000. She is entitled to a 100% uplift from Arthur (to £650,000). If she leaves her estate of £650,000 to Elgar her nil rate band will be unused but Elgar will only be entitled to a 100% uplift (to £650,000 assuming the nil rate band is still £325,000 when he dies). Arthur’s transferable nil rate band has been lost. So Bertha’s Will might instead leave all or part of her estate on discretionary trust. She could leave £650,000 on discretionary trust from which Elgar will be able to benefit during his lifetime and on his death his estate will be still be entitled to his unused nil rate band (£325,000). In effect this ensures that all three nil rate bands are used rather than just two.
  2. If Elgar dies first leaving any of his NRB unused, it will be wasted as Bertha can only have a maximum of 100%. So Elgar’s Will might provide for an NRB legacy or discretionary trust of his nil rate band.

Survivorship clause

Post the introduction of the transferable nil rate band on 9 October 2007 it is also important to consider carefully whether a provision that a gift to a spouse is conditional upon them surviving the first to die by 30 days (largely standard in the past) is still appropriate. Unless both estates are greater than the nil rate band, there is a danger that the nil rate band on one estate may be partially unused.

Information in the above article should not be taken or relied upon as personal advice.   Any individual requiring information or advice on their own specific circumstances or on their own account should contact a suitably qualified professional.


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