Inheritance Tax and the Nil Rate Band

Alastair Liddiard reflects on how the advice given on Inheritance Tax (IHT) for spouses and civil partners has changed a fair bit from when he qualified as a solicitor 20 years ago.

So what has changed?

Two big changes, the first being the introduction of the Transferable Nil-Rate Band allowing the estate of the second spouse to die to benefit from the unused portion of the Nil-Rate Band of the first spouse to die.

The second is the Residence Nil Rate Band, which is a qualifying allowance available to anyone with a house and children.

The solution then?

Prior to 2008, the Nil-Rate Band was a “use it or lose it” allowance with no transferable element.

In order to use the Nil-Rate Band of the first spouse, a discretionary trust was created for the benefit of the surviving spouse and the children and sometimes the grandchildren.  Generally, the trust’s assets were a loan made by the Trustees in favour of the surviving spouse so that on the survivor’s death, this loan counted as a debt of the estate, thus reducing the taxable value for IHT.

Because of the introduction of the Transferable Nil Rate Band, this more complicated structure became less useful; simply leaving all assets to the surviving spouse automatically qualified for all IHT allowances. The Nil Rate Band stands at £325,000, allowing a total of £650,000 to be claimed on the survivor’s death.

What are the benefits and issues of the Residence Nil Rate Band?

The Residence Nil-Rate Band (RNRB) brought an additional allowance for an individual of up to £175,000 to reduce the value of the family home. This is also transferable to the surviving spouse, although strings are attached to the claim and one of these is that the RNRB starts to diminish in value if the gross estate of the deceased is in excess of £2 million.

This brings the Nil-Rate Band discretionary trust back into play. If a trust is created on the first death which reduces the surviving spouse’s estate below the £2 million mark (or further towards it), the RNRB allowance comes back into the survivor’s estate.

The value of the Transferable Nil-Rate Band has not changed and is not going to change for some time, so it sitting in the trust rather than transferring to the survivor’s does not affect the total IHT savings in respect of the “ordinary” Nil-Rate Band.

Any other opportunities?

Yes – if you were previously married and your spouse died and left you their estate and you have since remarried, then creating a Nil-Rate Band Discretionary Trust to capture this additional Transferable Nil-Rate Band from your first marriage affords us three IHT allowances; the first spouse and two from the new marriage, increasing the potential IHT savings from £650,000 to £975,000, plus the Residence Nil-Rate Bands of £350,000, giving total IHT allowances of £1.325m.

Alterations to taxation legislation can lead to a return to our “Greatest Hits”. The resurrection of the Nil-Rate Band Discretionary Trust as an IHT planning tool is certainly one of these.

Here to help

For advice about Nil-Rate Band Discretionary Trusts and Inheritance Tax planning, please contact Alastair Liddiard, Partner and Head of Trust and Estate Administration.

Please note the contents of this article are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances. issue 63. 

This article was originally written for the Inspire Magazine, issue 63.

NLA article not to be reproduced.