Mark McLaughlin

Introduction

Pre-Budget Report Note 16 (‘Inheritance Tax (IHT) Nil-Rate Band’) came as a major surprise to many IHT practitioners, including me! PBRN 16 announced that changes would be introduced in Finance Bill 2008 to allow a claim to be made for any unused proportion of the IHT rate band on a person’s death to be transferred to a surviving spouse or civil partner who dies on or after 9 October 2007. Draft legislation introducing a new IHTA 1984, s 8A (‘Transfer of unused nil-rate band between spouses and civil partners’) and s 8B (‘Claims under section 8A’) plus draft explanatory notes were also released to coincide with the Chancellor’s PBR announcement. 

The main thrust of estate planning involving spouses and civil partners had hitherto been to ensure that the nil rate band on the first death was not wasted by reason of an exempt legacy to the survivor. Conventional advice to spouses or civil partners was therefore to draft their Wills so that an amount sufficient to utilise the nil rate band on the first death was left to a chargeable (i.e. non-exempt) legatee such as adult children or, as in the case that follows, to the trustees of a Discretionary Will Trust.

The proposed changes leave something of a questionmark over how best to deal with existing Wills with Discretionary Trusts built into them, as the following query illustrates.

Query from TaxationWeb visitor ('jel117')

My father died last year and his will allowed for a NRBDT but no IOU scheme clauses etc. The assets to go into Trust are 1/2 share house £255k and £30k cash. The Will allows for trustees to use funds for wife, children and grandchildren (minors). Ultimate beneficiaries are children (all adults) on death of wife.

1. In light of 9 October 2007 Pre-Budget Statement can we do a deed of variation so all assets go to surviving spouse?

2. If not, do my mother and I (as trustees) need to get a trust deed drawn up (solicitor who did will is useless and thinks trust can be 'broken')?

3. Presumably this NRBDT will fail as mother still lives in house so can I break the Trust and is that legal?

Editor’s Comments

Assuming that the measures announced in PBRN 16 become law, estate planning such as described above will no longer be necessary simply for the purposes of ensuring that married couples and civil partnerships utilise the benefit of a nil rate band per individual wherever practical.  

Of course, the proposed changes will not become law until the Finance Act 2008 receives Royal Assent, probably in mid-Summer 2008, albeit that the legislation will have retroactive effect from 9 October 2007. Most people will probably agree that the proposed changes are a 'good thing'. It therefore seems unlikely that there will be any significant amendments to the thrust of the draft legislation.

In addition to the responses below, it is interesting to note the following guidance from HM Revenue & Customs (HMRC) (http://www.hmrc.gov.uk/pbr2007/it-nil-rate-guide.pdf) on the subject:

"Existing Wills

14. The new rules will not change the effect of existing Wills. So people who have, for example, a nil-rate band trust written into their Will do not have to take any action as a result of this measure. But if someone wants to change their Will to take account of the new rules, that change can usually be made by a Codicil, rather than having to rewrite the Will.

15. Where someone dies after 9th October 2007 with a nil-rate band discretionary trust in their Will, an appointment of the trust assets in favour of the surviving spouse or civil partner (before the second anniversary of the death, but not within the three months immediately following the death) would normally be treated for IHT purposes as if the assets had simply been left to the surviving spouse or civil partner outright. Ending the trust in this way would mean that the nil-rate band was not used on the first death, and so the amount available for eventual transfer to the surviving spouse or civil partner would be increased accordingly."

The second paragraph (15) is a little confusing, because two-year Discretionary Will Trusts were a planning option before the Pre-Budget Report. It is not clear why the second death must be after 9 October 2007, as the guidance indicates. Hopefully, this is an error, in which case HMRC ought to put it right.

Forum responses included those reproduced below.

'Sarah R' commented:

There doesn't seem to be a reason why a deed of variation wouldn't be possible from what you have said and unless your mother has substantial assets it may be easiest from a practical perspective.

In order to give you a better idea of the best solution I would like to take a look at a copy of the will and get a few more details from you. Please contact me if you are interested in this.

Sarah Roberts
Solicitor
Lester Aldridge LLP (Bournemouth)
This e-mail address is being protected from spambots. You need JavaScript enabled to view it
01202 786184

Bob Fraser commented:

Peter, I've used Lester Aldridge in the past for clients.

Bob Fraser
Chartered Financial Planner

'maths' commented:

At this stage I would be reluctant in view of the Pre Budget announcements to rush into anything (subject to not missing the 2 year limit re DoV).

I suspect that re any DoV you will need the approval of the court because of the minors (grandchildren) whose interests would seem to be taken away (even if ultimately they are better off).

I do not agree with your point 3 ie it does not follow that the trust fails just because your mother lives in the property.

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Article Added Saturday, 03 November 2007 | 3349 Hits

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