The end of nil rate band trusts for couples?

Before the transferable nil rate band (NRB) was introduced in 2007, it was common practice to advise married couples to make wills containing a NRB trust. This was done to make use of both spouses' NRB and so minimise inheritance tax (IHT). Many probate practitioners must now advise the executors of the first spouse/civil partner to die whether, in the light of the transferable NRB, it is worth setting up the trust.

Although the deceased's will may have been prepared primarily with tax planning in mind, the creation of the trust has other benefits which the executors should consider.

Option 1: set up the NRB trust and keep it separate

For many couples their main asset is the family home. The deceased's share of the family home up to a value of the current NRB of £325,000 (assuming no other transfers of value have to be brought into account) can be transferred to the trust. The benefits ar that if the law changes, the first spouse's NRB has been used or banked, and when the property is transferred to the trust the deceased's share is discounted which could result in a saving of IHT.

Although no discount can be applied to the IHT value of joint property, because of the related property rules, this does not apply when the executors value the deceased's share in order to appropriate it to the trust. The executors make appropriations to settle a cash legacy of the NRB at the actual value of the assets appropriated at the time, not at the value ascertained under IHT rules. So if the surviving spouse is a co-owner and still lives in the property the value of the deceased's share can usually be discounted by at least 15 per cent.

Suppose A and B own a home worth £760,000. A dies and his 50per cent share is worth £380,000 for IHT purposes because his and B's shares are related property. But for the purposes of making an appropriation to the trust the 15 per cent discount is applied, making A's share worth only £323,000. The whole of A's share can therefore go to the trust.

Suppose that, when B dies, the value of the whole property has gone up 10%, to £836,000, and the NRB has increased to £357,500.

The value of B's half for IHT purposes is discounted by 10 per cent to £376,200, because the trust owns half. Only £18,700 is over the NRB of £357,500, so the IHT is £7,480. As the whole of A's NRB was not used, a small percentage can be transferred, reducing the IHT liability further.

If the NRB trust had not been set up on A's death, and a claim made to transfer A's NRB, the IHT payable would be £48,400. The IHT saving in setting up the trust is £40,920.

It is recommended that the NRB trust is not set up until after the second anniversary of the first death and, at that time, the trust is varied giving the survivor the right to occupy the trust's share of the property. This ensures that the survivor is not given an immediate post death interest. The survivors' right of occupation ensures that the trust is able to benefit from Capital Gains Tax main residence relief, provided the property continues to be the survivor's main home.

Asset protection:

Your clients may be concerned about nursing home/care fees, the survivor's re-marriage or bankruptcy. If the trust owns part of the family home, that part is protected for the ultimate beneficiaries, who are likely to include the deceased's children and further generations.

If the survivor needs to fund care home fees, only their half of the property is taken into account. The trust's share is disregarded.

If the survivor re-marries, and the NRB trust has not been set up, all of the deceased's assets would be in the survivor's hands and they would have complete control. The survivor could decide to pass their estate to their new spouse excluding the children.

Assets likely to increase in value are outside the survivor's estate:

Where there are assets, such as land or buildings where development value may be realised in the future, it is sensible to get as much of the value as is available into the NRB trust and therefore outside the survivor's estate.

I have dealt with a prime example of where this was a huge benefit. The married couple owned a cottage and surrounding land with a stable block. After the death of the first spouse, planning permission was granted to turn the stable block into a home for residential use. The value of the stable block after the conversion was considerably more than at the date of death.

Secure agricultural or business property reliefs:

If the deceased owned assets that qualify for 100 per cent agricultural or business relief, we would recommend that all of those assets should go into the trust. This secures the relief, perhaps for much more than the value of the NRB on the death of the first spouse.

Assets qualifying for 50 per cent relief should also be directed to a NRB Trust, where the relief allows double the amount of the NRB to be sheltered from 40 per cent IHT.

Option 2: set up the trust but in the survivor's IHT ownership

The executors could give the survivor the right to the income of the trust, or the right to live in any property, within two years of the first death. For IHT purposes the surviving spouse is treated as owning what is in the trust (the value is aggregated with their estate as they have a life interest), and the first spouse's NRB has not been used. As none of the NRB has been used on the first death, it can be transferred to the surviving spouse, assuming the law does not change.

The benefits include asset protection for the ultimate beneficiaries and should prevent the value of the assets being brought into account for care or nursing home fees.

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