Joseph Beams discusses the Nil Rate Band and considers discretionary trusts and why they should not be ignored

Prior to the introduction of the Nil Rate Band in October 2007, it was very common for married couples to set up Nil Rate Band Discretionary Trust Wills, as a tool to mitigate the inheritance tax liability on the surviving spouse’s death.

Prior to October 2007, if a married couple left everything to one another there would be no inheritance tax to pay on the first death, an unchanged position post October 2007. However, on the second death there would only be one nil rate band available to offset against the value of the estate chargeable to inheritance tax.

On the death of the first spouse, Nil Rate Band Discretionary Trust Wills transfer assets up to the value of the available Nil Rate Band to a discretionary trust. The assets transferred to the discretionary trust do not form part of the estate on the surviving spouse’s death. Therefore, the value of the estate chargeable to inheritance tax on the surviving spouse’s death is reduced.

However, since October 2007, if the Nil Rate Band remains unused on the death of the first spouse, it can be transferred to the surviving spouse. This has the impact of doubling the inheritance tax allowance on the surviving spouse’s death from £325,000 to £650,000.

Options available for dealing with a Nil Rate Band Discretionary Trust Will

There are the following options available in dealing with the Nil Rate Band Discretionary Trust:

1. Wind up the trust by appointing all the assets passing into the Nil Rate Band Discretionary Trust to the surviving spouse;
2. Apportion some or all of the assets passing into the Nil Rate Band Discretionary Trust to other family members;
3. Keep the Nil Rate Band Discretionary Trust in existence by transferring assets from the deceased’s estate into the trust; or
4. Keep the Nil Rate Band Discretionary Trust in existence by use or a debt arrangement or charge scheme.

Nil Rate Band Discretionary Trust Wills are complex and the best option to take will depend on several difference factors, such as the financial position of the surviving spouse and the health of the surviving spouse.

For further information on this topic or on any other legal area, please contact John Szepietowski or Kay Stewart at Audley Chaucer Solicitors on 01372 303444 or email admin@audleychaucer.com or visit our Linkedin page.

Joseph Beams

This information was correct as at September 2021