In 2007 the HMRC introduced the ‘transferable nil rate band’ for married couples. This meant that when the first spouse passed away and left everything to their husband or wife not only was this free from inheritance tax (regardless of value) due to the existing spouse exemption but they would also be passing on their nil rate band allowance. This means that when the second spouse passes away not only do they have their own allowances to offset against any tax due on their estate but also the unused allowances of their spouse.

This change had huge implications for Will drafting at the time. Previously when a married couple had a combined estate which exceed one nil rate band it was important that a Will was drafted so that on the death of the first spouse their nil rate band was ‘banked’. This often meant leaving a tax free gift into a discretionary trust.

While many couples updated their Wills after this change to make simpler Wills and remove these trusts, not everyone did. Some never got around to it while others saw the additional benefits of discretionary trusts and decided to keep them. It is therefore common to still come across what we call ‘pre-2007 Wills’ with these arrangements in place.

Whenever a Will creates a discretionary trust it is so important that the trust is dealt with properly at the time. One of biggest advantages of a discretionary trust is the flexibility they offer, they can be administered in a tax efficient way depending on the families circumstances at the time. Often when a trust exists there are several options including;

1. Implementing the trust fully and investing the funds
2. Distributing the trust in full to the surviving spouse and closing it down
3. Distributing the trust in full to other beneficiaries (children, grandchildren etc) and closing it down
4. Creating a loan back arrangement with the surviving spouse or other beneficiary
5. A combination of the above

All of the above options have different implications for inheritance not only on the first death when the Trust is created but also on the death of the surviving spouse. The different options will affect not only what is in the survivor’s estate but also what allowances they can claim from their spouse’s estate.

What we also come across all too often, are families whose parents had these arrangements in place but who didn’t deal with the trust at all on the first death. Often, they come to us with the misunderstanding that ‘Dads Will left everything to Mum’ so nothing has been done and the property remains in the name of both parents. We then try and work out what nil rate band can be claimed based on little bits of information that can be recalled from years before. When we break it down, we can often work out what the most tax efficient option is but we then face an uphill battle of proving this to the HMRC.

If a trust is dealt with properly on the first death the appropriate paperwork can be stored with the surviving spouse’s Will so on their death it is clear what happened and all the necessary evidence is there to demonstrate this to the HMRC. This can save enormous amounts of time, money and tax!

If you would like to discuss this further please do not hesitate to get in touch with our private client team – it’s never too late, or too early, to put things in place.

We are always here to help so please call on 0161 928 3848 or email mch@mchaleandco.co.uk. We have face to face, video or telephone calls available respecting safe social distancing requirements.