January 2010
This month’s article continues with Inheritance Tax (IHT) considerations of the transferable nil rate band (NRB) introduced from 9 October 2007.
Basic strategy
Post 9 October 2007 any consideration of using the IHT (NRB), on the first death, can probably be discounted – the anticipation being that the NRB will be larger (to be claimed on the surviving spouse’s /civil partner’s death by their personal representatives) –any such increase (in the amount of the NRB) would assist concurrent increases in asset values over ensuing years until the second death.
What about existing Wills made prior to (9 October 2007)?
Any arrangements that could have included involving the family home purely to utilise the spouse’s NRB (eg “debt” or “charge” schemes), as referred to in last month’s article, will now be unnecessary and consideration given to abandoning any such proposed arrangements if they are contained in existing (pre 9 October 2007) Wills.
Let’s assume husband/wife (or civil partners) are still alive and have already made Wills incorporating NRB discretionary trusts. If they feel uncomfortable, with the relative complexity of such trusts in their Wills; they could make new Wills, or perhaps a Codicil to their existing Will would be sufficient, to dispense with the (NRB) discretionary legacy.
However, it would be possible (where Wills contain such discretionary NRB provisions) for the Trustees of such a clause to invoke their discretion under Section 144 (IHTA 1984) and appoint funds absolutely to the surviving spouse. Professional advice should always be sought –particularly as to timing limitations of any such appointment.
Essentially –there would be no need to change existing Wills: on the first death the trustees (after waiting an initial period of three months) then appoint the entire (IHT) Nil Rate Band, as under the Will, absolutely to the surviving spouse –they have up to twenty four months from the date of the first death to do this. Usually, a deed of appointment, exercised by the trustees, is all that would be required.
Moving on to the death of the surviving spouse: again no actual requirement to change the surviving spouse’s existing Will. On the assumption the discretionary clause was properly drawn; it should incorporate a provision that (nil rate band discretionary terms would be excluded) if, at the date of the second death, the spouse is not married.
What can go wrong?
People can get into a muddle – (professional advisers are also not immune)! Not everyone is familiar with drafting deeds of appointment out of discretionary trusts; if the executors are all family members and (critical) time deadlines are missed -then beneficiaries could be worse off than if (the parent spouses) had just gone ahead and made new (simple) Wills.
Particularly, if an executor is a professional, he could be liable in negligence should he not be up to date with tax law or simply failing to achieve, what would be appropriate for the family overall, in terms of IHT mitigation. The sums potentially involved here are not insignificant – a misapplied (IHT) nil rate band of £325,000, @ 40% tax liability, is £130,000!
Although new Wills being (professionally) prepared for the spouses will involve fees –perhaps, in the light of the above, that would represent good value!
Next month: where Nil Rate Band discretionary trusts within Wills may still remain appropriate – there are four principal areas of concern which may be relevant in certain circumstances.
New Year’s best wishes to readers –remember timely (estate) planning is invariably cheaper than to do nothing!
Andrew Murdoch
(ACIB, AIFP, Dip PFS, TEP, Solicitor)
