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.