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Is the Nil Rate Band Discretionary Trust in the Will still needed?

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Heather Lally, Associate Solicitor, Estate and Trust Practitioner and fully accredited member of Solicitors for the Elderly from FDR Law, considers the options as to whether a Nil Rate Band Discretionary Will Trust should be kept on the death of the first spouse or civil partner.

Prior to 9 October 2007 it was common for couples to include a Nil Rate Band Discretionary Trust in their Wills, so that on the first death the Inheritance Tax free Nil Rate Band available at the time (currently £325,000) would pass into the Trust and not to the survivor outright.  This was good tax planning at the time as it allowed both individuals’ Nil Rate Band allowance to be used, rather than the first being lost if everything passed to the spouse.

Changes to the Inheritance Tax rules mean that these trusts are no longer necessary for Inheritance Tax planning purposes.  However, some people do keep the trust for other reasons such as concerns over divorce and potential re-marriage, children from different relationships, bankruptcy, disabilities and care fees planning.  For these individuals there may be very good reasons to keep the trust.

However, a further allowance, the Residential Nil Rate Band was introduced in April 2017.  This provides another allowance of up to £175,000 if residential property is passed down to direct descendants.  This allowance is lost if the property passes into a discretionary trust instead of direct descendants.   This can prove a dilemma for clients caught between the desire to protect the overall estate and maximise Inheritance Tax relief.

Heather Lally advises clients on their options about keeping or ending these trusts.  In a recent case which Heather has worked on, ending the trust achieved a £70,000 tax saving.

In some cases, especially with larger estates, it may be possible to achieve the best of both worlds by keeping the trust and the additional tax relief.  This requires careful planning and consideration of what will go into the trust.

Whenever a Will includes a Nil Rate Band Discretionary Trust it cannot just be ignored.  The Executors must consider the best way to either use it or end it and they must make a decision within 2 years of death if it is to be tax efficient.

Heather recommends that Executors faced with this sort of trust take specialist advice as early as possible to ensure they make the right decisions.

For more information in relation to Trusts, Wills, Inheritance Tax and estate administration please contact Heather Lally on 01928 739300 or email Heather.Lally@fdrlaw.co.uk