Transferable Nil Rate Band: planning ideas

Who can get the Transferable Nil Rate Band

The Transferable Nil Rate Band NRB is available to survivors of a marriage or civil partnership who die on or after 9 October 2007. Prior to the introduction of the transferable NRB, spouses and civil partners who wished to use both NRBs typically drafted NRB discretionary will trusts.

This article considers the interaction of discretionary will trusts and transferable NRBs.

Discretionary will trust in place after first death

If a discretionary will trust was set up on first death to fully utilise the available NRB, there will be no unused NRB to transfer to the surviving spouse.

If that first spouse died less than two years ago, an appointment of the trust assets by the trustees to surviving spouse would be treated for IHT purposes as if the assets had been left to the survivor outright (S144 IHTA 1984). In that event, the unused NRB on first death would be available for transfer. The appointment must be made before the second anniversary of death.

Alternatively, the discretionary will trustees could appoint the trust assets to an interest in possession trust for the surviving spouse rather than outright to the spouse. This would create an IPDI (immediate post death interest) and secure the spouse exemption. In this case the trust would control the destination of those assets after the spouse’s death rather than the will of the spouse (or laws of intestacy if no will). Again, the appointment must be made no later than two years after first death.

The role of discretionary will trusts

Despite the availability of the transferable NRB, many married couples still choose to establish a discretionary will trust on first death.

There may be non-tax motives for the surviving spouse not inheriting everything. For example asset protection where there are children from a previous relationship, or financial instability of the surviving spouse. In addition, outright ownership of assets by the surviving spouse might impact on means tested benefits.

A NRB trust may be advantageous where the surviving spouse remarries.

Examples illustrating how three nil rate bands can be achieved

Gilbert died in 2007/08 leaving everything to his spouse Harriet who later married Ivan. Harriet dies when the NRB is £325,000 and pre–deceases Ivan. Under the transferable NRB provisions her NRB will be increased to £650,000. She leaves everything to Ivan who subsequently dies when the NRB is still £325,000. On Ivan’s death, the uplift is restricted to 100% – £650,000. In other words, Gilbert’s NRB has been wasted.

Instead of leaving everything to Ivan, Harriet could have left £650,000 to a discretionary will trust including Ivan as a potential beneficiary. There will be no transferable NRB on Ivan’s death but the net effect is that three NRBs have been used rather than two.

• 2 x NRB utilised on death of Harriet – NRBs of Harriet and Gilbert
• 1 x NRB utilised on death of Ivan – NRB of Ivan

Now, let’s change the circumstances and assume that Ivan dies before Harriet.

Gilbert died in 2007/08 leaving everything to his spouse Harriet who later married Ivan.

Ivan dies when the NRB is £325,000 and pre–deceases Harriet. He leaves everything to Harriet who subsequently dies when the NRB is still £325,000. On Harriet’s death, the uplift is restricted to 100% – £650,000.

Instead of leaving everything to Harriet, Ivan could have left his NRB to a discretionary will trust including Harriet as a potential beneficiary. Again the net effect is that three NRBs have been used rather than two.

1 x NRB utilised on death of Ivan – NRB of Ivan

2 x NRB utilised on death of Harriet – NRBs of Harriet and Gilbert.

Where it is considered likely that investment growth will exceed NRB increases, then a discretionary will trust may be preferable on first death. Alternatively, consider leaving everything to surviving spouse who then makes lifetime gifts. The aim being to benefit from the transferable NRB, but reduce the survivor’s estate by the inherited assets. That strategy however rests on the survivor living for at least seven years from date of gift and not requiring access to the amount gifted (if a discretionary will trust had been created, the survivor can potentially benefit from this).

A discretionary will trust offers a means of crystallising business or agricultural property relief before it is lost either through a sale or possibly a change in legislation.

Example of business property relief being crystallised

James and Kirsty are married. For a number of years, James has owned shares in a private trading company. In conjunction with his co–shareholders he has entered into a shareholder protection arrangement. On death of a shareholder, the surviving shareholders will buy the deceased’s shares under the terms of a ‘cross option’ agreement.

If James dies, 100% BPR will be available for IHT purposes but if the share proceeds are paid to Kirsty, then on her death they will potentially give rise to an IHT liability.

If however the sale proceeds sit within a discretionary will trust (free of IHT due to BPR) then the trust fund will remain outside the survivor’s estate for IHT purposes.