Clarkslegal LLP - Solicitors in Reading and London

Legal Updates

Wills and Estate planning issues

08 April 2010 #Real Estate


1. The Transferable Nil Rate Band

Prior to 9 October 2007, if the nil rate band (NRB) (£325,000 (20010/2011)) less any non exempt gifts made in the 7 years prior to death) was not used before the first death or passed to the surviving spouse outright, the advantage of the NRB was wasted. 

Previously Wills often included a clause incorporating a discretionary trust (‘the NRB Trust`) in which the NRB could be held.  The beneficiaries of such trust would include the surviving spouse and family.

For deaths after 9 October 2007, a transferable nil rate band applies. It is no longer necessary, in most cases, for a Will to contain a NRB Trust.  Instead, the unused NRB on the first death is translated into a percentage.  The percentage is used to calculate the amount of the deceased spouse`s ‘transferable portion` to be used on the second death. 

First death 
              
NRB available on first death in 1996    £150,000

Chargeable gifts made 7 years prior to death in 1996  (£40,000)

Non-exempt legacies under the Will on the first death  (£20,000)

Balance of NRB available      £90,000

Percentage of NRB to carry forward

90,000 / 150,000 x 100 = 60%

Second death

NRB available on second death in 2009   £325,000

Plus

NRB amount from first death in 1996
60% x £325,000       £195,000

Total NRB available on second death    £520,000

(i) The advantages of retaining the NRB Trust

  • The individuals named in the Will can benefit from the NRB Trust but the value of the assets do not form part of the individual`s estate for IHT purposes.
  • The assets in the NRB Trust can be protected from events such as

    (a) Divorce; or
    (b) remarriage

    and for those beneficiaries who are

    (a) Disabled; or
    (b) On means tested benefits; or
    (c) Children of a first marriage.

  • Flexibility - the family circumstances can be reviewed on the first death and the assets distributed accordingly.
  • Nursing Home Fees - NRB Trust assets are not presently assessed for Local Authority assessment purposes. 
  • Assets that qualify as business property or agricultural property can be held in the NRB Trust as they are exempt from IHT whilst they qualify as such. 

    If the assets lose their IHT exempt status, the NRB Trust assets can remain in the Trust but outside the beneficiaries` estate for IHT purposes.   They are then taxed at 6% on capital distributions and at the ten year anniversary which may be preferable to an IHT charge of 40% if held by an individual.

(ii) The disadvantages of retaining the NRB Trust

  • The NRB is fixed at the date of the first death and will not benefit from the annual increase in the NRB.
  • The Trustees must complete tax returns on an annual basis and IHT forms on the occurrence of certain events.

2. Changes in tax treatment of Trusts and how it affects your will

Following the Finance Act 2006 the tax treatment of discretionary trusts remains unchanged. From 5 April 2006

  • All lifetime trusts are taxed in the same way as a discretionary trust unless the beneficiaries are

    (a) bereaved minors; or
    (b) qualify as a disabled person.

  • Trusts created by Will are taxed in the same way as those created during a lifetime. The exception being a life interest trust in favour of a surviving spouse.
  • If a testator`s child/ren inherit capital and income at an age later than 18 but earlier than 25, there is a charge to IHT at a maximum rate of 4.2%.

3. General points to consider in relation to your will

(i) Use a Life Interest Trust to protect the capital of your estate whilst providing the surviving spouse with a right to income.  This is especially important if:-

  • You have children from a former marriage;
  • Your surviving spouse remarries and the estate inherited from you could pass to the second spouse rather than to the children from the first marriage; and
  • You are assessed for Local Authority Nursing Home fees.  The income would be treated as the ‘means` of the surviving spouse but the capital of the NRB Trust would not.

(ii) A separate trust for Business Property and Agricultural Property.

(iii) Jointly Owned Assets automatically pass to the surviving joint owner and can simply be transferred on production of a Death certificate saving legal costs and Probate Court fees.

(iv) If Property is held as "joint tenants", the deceased`s interest passes to the surviving joint tenant.  Interests in property held as "tenants-in-common" will pass under the terms of the deceased`s Will.

(v) Bank accounts held in your sole name will be frozen until the Grant of Probate is obtained.  Sufficient monies should be held in a joint account to pay household expenses for approximately eight weeks after the first death. 

(vi) Joint Deaths - If it is impossible to ascertain which of a couple dies first, the younger is deemed to survive the older.  If the younger has left their estate to different beneficiaries or in different proportions, your Wills may not achieve what you had expected.  Your Wills should therefore mirror each other.

4. Some general points to consider in relation to IHT planning

Below are some simple ways to mitigate IHT

(i)  Exempt Gifts

  • Between husband and wife except where the recipient spouse is non UK domiciled - the exemption is limited to the NRB plus £55,000.
  • Annual Exemption of up to £3,000 in any one tax year.  Also use your previous year`s unused exemption.
  • Small gifts up to £250 to any number of individuals.
  • "Normal expenditure out of income" - Gifts of any amount made out of income, are "normal expenditure", provided you are then left with sufficient income to maintain your usual standard of living.
  • Wedding gifts of
    • Up to £5,000 to a child;
    • £2,500 to any grandchild or great-grandchild; and
    • Up to £1,000 to any other person.
      The gift should be made either before or on the day of the wedding and should be conditional upon the marriage taking place.
  • To Charities, political parties and educational bodies

(ii) Potentially Exempt Transfers (PET)

A PET is a lifetime transfer or gift, which is exempt from IHT if you survive 7 years from the date of the gift.

If you die within 7 years of making the gift, its value at the date of transfer is added back into your estate for IHT purposes and reduces the value of the NRB available to your estate.  If the PET becomes chargeable on your death within 7 years, the donee of the gift will be liable for any IHT due.

(iii) Deeds of Variation

If you are the beneficiary of an estate and have no requirement for the funds, you may vary or disclaim your entitlement, within 2 years from the date of death.

(iv) Life Policies etc

You can write trusts over death benefits in pension funds, death in service benefits, term assurance policies and accident policies, so that the benefit does not pass into your estate and is not taxed

Clarkslegal, specialist Real Estate lawyers in London, Reading and throughout the Thames Valley.
For further information about this or any other Real Estate matter please contact Clarkslegal's real estate team by email at realestate@clarkslegal.com by telephone 020 7539 8000 (London office), 0118 958 5321 (Reading office) or by completing the form on this page.

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Simon Berry

Simon Berry
Partner

E: sberry@clarkslegal.com
T: 0118 960 4661
M: 07920 144 780

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