Death and Taxes: The ‘Nil Rate Band’Written on May 13, 2014 by Kirk Rice LLP
Financial Services QuestionsThe Question:
We have Wills that include something called a Nil Rate Band Trust. We have read that at second death the estate automatically benefits from twice the exemption for inheritance tax. Should we still have the Trust?
Kirk Rice LLP answers:
This is a common query since the Transferable Nil Rate Band (NRB) was introduced in October 2007 for couples in marriage or civil partnership. I will highlight some points but urge anyone considering this to seek professional guidance as there are numerous implications that may affect specific circumstances.
The NRB was set at £325,000 in April 2009 and is intended to remain at this level until April 2018. Inheritance Tax is levied at 40% on the value of estate above this Band although there is NO Inheritance Tax between husband and wife. Since 1986 Wills were often written to create a Trust upon first death into which assets, owned by the first to die up to the value of the NRB would be passed. This would be free of Inheritance Tax and the Trustees could lend to any of the beneficiaries, including the surviving spouse. On second death, any loans to the spouse are repaid therefore preserving the Nil Rate Band of the first to die via the Trust.
The second person to die then has their NRB and the estate pays IHT at 40% on the excess. The Trust in effect allows both NRB’s to be used and without it one of the NRB would typically be wasted. Since 2007 it has been possible to Transfer the NRB of the first to die to the survivor. This does require the Personal Representative of the Second Death to provide evidence from the First Death to support the transfer of any unused NRB. Who benefited? What they were entitled to; were there any jointly owned or trust assets, any gifts made in the 7 years before. As there can be many years between first and second death providing this information may be problematic.
The previous Personal Representative, relatives, friends, accountant and solicitor may all have a part to play in finding all the information the Tax office requires to substantiate the claim. Therefore, good record keeping is necessary to provide for the future claim. As to which is the best option for you, I do not know without understanding your full circumstances and needs. In estate planning the paramount objective is to protect your chosen lifestyle whilst taking steps to reduce the tax exposure.
If you would like more advice regarding this issue or any other financial services matter, please contact us.
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This is based on current understanding of legislation and practice which may change. As Independent Financial Advisers we provide advice on estate planning solutions usually in conjunction with your legal and tax advisers.
Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.
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