Partner Caroline Casagranda, in our leading Wills, Probate, Tax & Trusts team, responds to the Telegraph article ‘Inheritance tax trap: more than 100,000 families won’t get the new tax break’ published on 25 February 2017.
The above mentioned article, published in the Telegraph newspaper in February, has triggered a large number of enquiries from clients who have been made to worry unnecessarily.
The type of wills referred to in the article are ones which include a discretionary trust of the inheritance tax nil rate band (NRB) on the first death of a married couple or civil partners. The NRB is the allowance available to everyone on which assets are taxed at 0% on death. The NRB is currently £325,000. It is true that the type of will referred to was very common before the changes to the inheritance tax rules which came into being in October 2007. However, NRB discretionary trusts can still be an effective means of inheritance tax planning for some people and do not, of themselves, preclude the availability of the new ‘residence nil rate band’ (RNRB) which comes into effect on 6 April 2017. The trustees of these NRB discretionary trusts simply need to take advice as to which assets from the deceased’s estate to use to constitute the trust to ensure the maximum effectiveness for inheritance tax planning; this is something they should be doing anyway.
If, when the time comes, the NRB discretionary trust is not the way to go, it is not necessary (as described in Mr Brodbeck’s article) for the beneficiaries to enter into a deed of variation (in fact it may not be possible). Instead, the trustees of the NRB trust simply use their power under the terms of the trust to bring it to an end in favour of a chosen beneficiary or beneficiaries (normally the surviving spouse or civil partner). If this is done within two years of death, the trust is treated, for the purposes of the inheritance tax legislation, as never having existed and as if the deceased had made an absolute gift in his or her will to the chosen beneficiary or beneficiaries.
In some instances, the use of a NRB discretionary trust will actually assist in securing the availability of the RNRB. This is because it can be used to remove assets which are likely to increase in value from the estate of the surviving spouse or civil partner, helping to keep the value of survivor’s estate below the £2m threshold where the RNRB starts to be withdrawn.
The message to clients with NRB discretionary trusts is very clear:
- do not panic
- there is no need to do anything now
- wait and see
The same principle applies to clients whose estates are left to discretionary trusts on the death of the surviving spouse or civil partner; the property can be appointed out of the trust to direct descendants within two years of death and the RNRB will be available. There is no need to make immediate changes now.
For further information or legal advice, please contact law@blandy.co.uk or call 0118 951 6800.
This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.
