The effect on new IHT rules where a trust is part of will conditions

[gfod49]

On the advice of a solicitor my wife and I have mirror wills (and are tenants in common regarding our property) incorporating a trust. In the event of the first death the nil rate band goes into trust with three trustees, the remaining spouse and our two sons, to determine the disposal. At the second death the estate is divided equally between our two sons. My concern is it appears that the trust might preclude the ultimate beneficiaries from receiving the new property zero rate band due to the wording of the legislation.

[maths]

Assuming you are referring to the Residence Nil Rate Band for IHT then one of the conditions for it to apply is that the residential interest on death is left to a lineal descendant. Thus, the proportion of the property left to (typically) a nil rate band discretionary trust on the first death will not qualify for the RNRB.

[gfod49]

Thank you for your reply given the complexity of revising the wills incorporating the Trust I assume it would be simpler to use boilerplate wills where each spouse leaves to each other (including both types of nil rate bands) and then on the final death the estate is divided between the sons.

[maths]

I don't disagree with your last post.

The original need for nil rate discretionary trusts arose pre the transferable nil rate band provisions; these latter provisions have to some extent made the need for a trust superfluous. There are reasons when a trust may still be an acceptable option depending upon all the facts.

[Sophie K]

Wouldn't the gift of the house share on first death use up the standard NRB and then 100% transferrable RNRB is available to be claimed on second death? Essentially if the RNRB is not used on first death (whether because there was no residential interest or it didn't qualify) then none is used. There is a risk though that the half share remaining is not worth enough to fully utilise two RNRBs though.

Below I've copied section 8F, 'default allowance' is defined in 8D as the sum of the residencial enhancement of £100k (rising to £175k) and any brought-forward allowance (which would be nil on first death, assuming no previous marraige):


8F Residence nil-rate amount: no interest in home goes to descendants etc

(1) Subsections (2) and (3) apply if the person's estate immediately before the person's death—

(a) does not include a qualifying residential interest, or

b) includes a qualifying residential interest but none of the interest is closely inherited

(2) The person's residence nil-rate amount is nil.

(3) An amount—

(a)equal to the person's default allowance, or

(b) if E is greater than TT, equal to the person's adjusted allowance,

is available for carry-forward.

[maths]

Wouldn't the gift of the house share on first death use up the standard NRB and then 100% transferrable RNRB is available to be claimed on second death?

Correct.

Essentially if the RNRB is not used on first death (whether because there was no residential interest or it didn't qualify) then none is used.

Correct.

There is a risk though that the half share remaining is not worth enough to fully utilise two RNRBs though.

This is often the problem.

Just for clarification; there is the nil rate band and the residence nil rate band.
Both can be carried over/transferred to a surviving spouse.