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If you made a Trust Will with us prior to 2008, you may wish to review this.  These Wills were designed to save Inheritance Tax by hiving off the Nil Rate Band on first death and allowing the survivor to borrow assets from the Nil Rate Band Discretionary Trust (NRBDT) created by the Will.

In October 2007, new legislation enabled the unused Inheritance Tax allowance of the first to die to become transferrable to the surviving spouse.  This meant that a discretionary trust was no longer necessary to save Inheritance Tax on first death and a “life Interest” trust could be used to protect assets on first death.

Although these trusts can still be used to protect assets up to the value of £325,000, they are discretionary in nature and do not guarantee the survivor’s right to enjoy the assets.  They can also incur unnecessary administrative and tax burdens at a time when the survivor may want a simpler solution.  These are described in more detail below.

Now often more tax-efficient options for married couples

Nowadays, Will Power often suggests this type of Trust for unmarried couples for whom Inheritance Tax is payable on first death but not for married couples.

This is because there are simpler and safer options for married couples who want to protect assets.  We can also provide Wills that protect an even higher amount of assets for your children and also save inheritance tax on a generational basis.

Disadvantages of this type of Trust Will instructed 2007 or prior

The disadvantages of this type of Trust Will instructed 2007 or prior are that the Trust would often take in assets of £325,000 on first death which may rise in value and trigger the need to register the trust and keep accounts and submit returns every year. This would add to the administrative burden of the trustees and likely incur accountancy fees.

Discretionary Trusts are required to pay tax annually on their income and gains as well as filing a tax return. In addition, many are also subject to a “Principal Charge” commonly known as “the 10-yearly charge” which usually occurs on the 10-year anniversary of the set-up of the trust and again every 10 years.

The Inheritance Tax exit charge

Inheritance Tax is charged up to a maximum of 6% on assets – such as money, land, or buildings – transferred out of a trust. This is known as an ‘exit charge’ and it’s charged on all transfers of relevant property.

The 10-year anniversary charge

As a trustee, you will have to pay a charge on every 10-year anniversary of the date your trust was set up if your trust contains relevant property with a value above the Inheritance Tax threshold.

Residence Nil Rate Band (RNRB)

The residence nil rate band (RNRB) was introduced from 6 April 2017. The aim of the RNRB was to make it easier for you to bequeath the family home to your direct descendants without being unduly taxed. This is in addition to the standard inheritance tax nil rate allowance of £325,000.

For a fuller explanation of RNRB please see our article How does the residence nil rate band (RNRB) save you Inheritance Tax (IHT)?

When the surviving spouse dies, the estate will be eligible for the additional RNRB threshold as long as their direct descendants then inherit their home (or proceeds if the home has already been sold).

If the home is held in a discretionary trust, it would not normally be included in the beneficiary’s estate. When the beneficiary dies, their estate will not be eligible for the additional threshold even if the home goes to the beneficiary’s direct descendants.

In summary

The reasons we recommend a review of your Trust Will if instructed in 2007 or prior to this date is that government legislation may have had an impact on your circumstances or your circumstances themselves may have changed.

The implications for you may be.

      • More complexity and greater administration.

      • Higher costs.

      • A need to register the Trust.

      • Capital Gains Tax when the property is sold.

      • A 10-year anniversary tax charge.

      • Your existing Wills may reduce the amount of RNRB tax allowance available to your children because, if the home is held in a discretionary trust, it would not normally be included in the beneficiary’s survivor’s estate.

    A Care Fee Will or Remarriage Will or Double Trust Will may be more appropriate for your circumstances because, when the beneficiary dies, the estate should then be eligible for the additional RNRB allowance. as long as their direct descendants then inherit their home.

    Next steps

    If you have a Trust Will instructed in 2007 or prior to that date, it may be that other types of Trust are now more appropriate, particularly if as a couple your joint estate is worth more than £650,000.

    We strongly suggest you take professional advice as this article is for general guidance only and individual circumstances may vary. A Will review meeting with us is free of charge if you wish to discuss these matters in more detail.

    It is important to review your Wills regularly in order to keep up with changes in legislation and taxation rules. Please contact us to review your circumstances.