Once the preserve of the very rich, with rising house prices, more and more of us find our estates are liable for large sums of IHT, leaving our families with significantly reduced funds. However, with careful planning, the amount payable can be mitigated.
This Will Trust is designed for couples to ensure that they both make use of their individual inheritance tax (IHT) allowances when then die. Their allowance, or Nil-Rate Band (NRB), is a threshold at which the first £325,000 (2020/21) is tax-free. Depending on your circumstances, other tax-free allowances may be available before the excess is taxed at 40%.
Many couples draw up simple Wills whereby on the death of the first partner the whole of the estate passes to the survivor. When the surviving partner dies they have only one NRB to offset against the value of the estate and this creates an IHT liability.
By equalising your estate and drafting Wills that incorporate the Nil Rate Band Trust you and your partner can make use of both Nil-Rate Bands, creating a significant IHT saving.
With the introduction of the Transferable Nil Rate Band, the Nil Rate Band Trust is generally applicable to unmarried couples with an estate value over £325,000. However, with the introduction of the Residential Nil Rate Band in April 2017, there may be some married couples or Civil Partners whose estate value exceeds the taper threshold (£2M) where having their Wills drafted with the Nil Rate Band Trust would be beneficial in order to claim the new tax allowance.
Mr Smith and Ms Jones are unmarried and have made no plans for inheritance tax. They have a joint property worth £430,000 with no mortgage and joint investments worth £145,000. In their Wills, they have left everything to each other and then their 3 children. Their total assets are currently below their two Nil-Rate Bands but their children will miss out on an inheritance of £100,000 as this is the IHT bill on 2nd death.
They re-draft their Wills to include the Nil Rate Band Will Trust and also equalise their estate by severing the tenancy on their property to tenants-in-common and by re-distributing their investments so that they are solely held.
They are now making use of both Nil-Rate Bands so no IHT at all is payable on second death. They also retain control of their assets and are able to take benefits from them.
The estate must be equalised so that both partners have sufficient assets in their own name. This often involves changing the tenancy on the main property (and perhaps additional properties) to tenants-in-common.
Here is a PDF with a more detailed explanation of the trust and a case study.