To keep or not to keep Wills with Nil Rate Band trusts?

Chances are, if you’re British, married and have a professionally drawn Will which predates 2008, you may have a discretionary trust of the Inheritance Tax Nil Rate Band (NRB) in it. It is often called something like the ‘Legacy Fund’ and, while the exact words may differ, the Will usually provides for a gift of the NRB (currently £325,000 if fully available) to trustees to hold on discretionary trusts for the benefit of the surviving spouse and children.

Having any trust in a Will needs careful thought. Will trusts add complexity and usually cost something to run after a death occurs. It is always much simpler for married couples to leave everything to the surviving spouse outright in their Wills, if that is what is desired. So it’s important to be clear, if you have a NRB trust in your Will, what benefit it may bring your heirs.

NRB Will trusts were the product of the bad old days, pre October 2007, when there was no Transferable Nil Rate Band (TNRB) for married couples (including civil partners). Back then, if you did not capture the first spouse-to-die’s NRB after the first death by using something like a NRB Will trust, it was lost for good and, after the surviving spouse’s death, the heirs – usually the children – only received the surviving spouse’s NRB-worth of assets free of IHT – based on today’s NRB, that would be just £325,000. The TNRB does away with all that fuss because if the first-to-die leaves all their assets to the surviving spouse on death, the surviving spouse’s executors can claim, in effect, another NRB after the surviving spouse’s death, the TNRB. (The mechanism is actually an uplift in the NRB as it stands at the time of the second death, inflated by the percentage of the first-to-die’s unused NRB.) So nowadays, married couples can leave up to £650,000 (i.e. £325,000 (survivor’s NRB) plus a further 100% of £325,000 (TNRB)) free of IHT. So is there any role for NRB Will trusts still, or can all married couples simply rewrite their Wills to leave everything to the survivor outright?

As is usual with tax law, there is no simple answer to this simple question! In short, NRB Will trusts can still prove useful. Here are some examples of when:

• The first spouse to die might own an asset which is likely to increase significantly in value between his/her death and the surviving spouse’s death. If assets with growth potential pass to the surviving spouse, all the growth will be taxed to IHT on the surviving spouse’s death, as the asset is in the surviving spouse’s estate. This problem is compounded because the Government has announced that the NRB will be stuck at £325,000 until 2021. Consider passing assets with growth potential to a NRB Will trust, to shelter the growth in there.
• The first spouse to die might own assets qualifying for IHT Business Property Relief or Agricultural Property Relief. As there is a danger that these incredibly generous reliefs may be lost if these assets pass to the surviving spouse, who then sells them, it is sensible planning to seek to capture the reliefs by passing these assets to a NRB Will trust, from which the surviving spouse and the children can benefit.
• The first spouse to die (D) inherited assets from a predeceased former spouse (spouse 1) but had remarried (to spouse 2). Spouse 1’s TNRB needs to be captured on D’s death, by using a NRB Will trust, because spouse 2’s executors may not be able to claim it in full otherwise, and an IHT saving of £130,000 will have been lost. Cue unhappy heirs.
• The new Residence Nil Rate Band (RNRB) (in force from April 2017) provides a new reason! (See my blog of 23 July 2015 for more information on the RNRB.) The RNRB also has a transferable element to it, much like the TNRB, which needs to be captured if there is a predeceased spouse on the first death. But in addition, the NRB trust may provide a means by which the surviving spouse’s estate is kept below the RNRB taper threshold of £2,000,000, thus enabling a claim for RNRB on the surviving spouse’s estate to be made.

Well drawn NRB Will trusts will facilitate these opportunities but also be capable of being collapsed easily, by passing everything to the surviving spouse outright perhaps, if they are not wanted or needed after the first death.

However, I finish on a warning. Even if you think NRB Will trusts are still right for you or your clients, the precise wording of the NRB gift should be checked out now to ensure that only what is intended passes to the Will trust and no more. Otherwise unintended consequences and a stressed out widow(er) may result! Gifts to a NRB Will trust of ‘the maximum amount which I can give without giving rise to IHT’, which is not uncommon wording in my experience, will take with it any NRB, available TNRB (if there is a spouse 1, as per the above example) and, from April 2017, any RNRB as well – in other words, potentially much more than just the single NRB that was envisaged when the Will was written many years ago, when the TNRB and RNRB were still a twinkle in the Chancellor’s eye.