Pointless Trusts - keep, bin or swap?

The nil rate band, currently £325,000, serves to exclude a substantial part of a person’s estate from charge to inheritance tax which is charged at 40% on death.  In the case of married couples or civil partners, the part of any of their estate which is left for the benefit of the surviving spouse is exempt from inheritance tax.  This spousal exemption meant that the nil rate band of the first spouse to die was not used.

Following the introduction of legislation in October 2007, if the first spouse to die did not use all of their nil rate band, the balance, in percentage terms, is transferable to the surviving spouse.  For many, this means the surviving spouse now has a total nil rate band of £650,000, made up of their own and their deceased spouse’s nil rate bands.  In addition to this, a further exemption in the form of the Residence Nil Rate Band is available to reflect the likelihood that the majority of the value of a person’s estate is represented by their home and any of this that is unused can also be transferred to the surviving spouse.  In total, on the second death, up to £1million of the estate would escape an inheritance tax charge.

The Residence Nil Rate Band is worth up to an additional £175,000 per person and is subject to the property being left to direct descendants of the deceased.  Where the Residence Nil Rate Band is available, this is applied first before biting into the single nil rate band or transferable nil rate band.  If your estate exceeds £2million, the relief is likely to be tapered.

Prior to October 2007, it was popular to set up a Nil Rate Discretionary Trust, normally in favour of the surviving spouse, the effect of which was to access the nil rate band of the first spouse to die.  This blog poses the question – if you have one of these trusts, is it still needed?  Should they be cancelled or do they still have a valid purpose.

In some circumstances e.g. where one of both of the parties have been previously married or who are not married or in a civil partnership, these trusts can be of benefit.

Everyone’s circumstances are different and this can be a complex area of tax to navigate, particularly where previous marriages are involved, so there is no one-size-fits-all answer.  Each case needs to be considered on its own merits and, if you want to review your position, please do get in touch with us, or your usual Haines Watts contact or your IFA if you prefer.