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15/03/2017

Wills and Probate

If your current Will was made before October 2007 and you were married at the time, there is every chance that it contains a Nil Rate Band (NRB) Trust.  Unless a trust is needed for reasons other than making sure the NRB was used, it is no longer serving any purpose and could soon pose the risk of actually causing additional tax.

Every person (unless they have used it in their lifetime) has a NRB available on their death in calculating the Inheritance Tax (IHT) due.  Before October 2007, it was a case of “use it or lose it”.  Most married couples wish the surviving spouse to inherit the estate of the first to die.  Since the gift to the spouse is exempt, it seemed to make good sense.  However, the unused NRB was wasted and, on the death of the survivor, the combined estates were taxed with only the surviving spouse’s NRB available.  Using today’s rates and assuming the survivor’s estate was greater than £650,000, this could cost £130,000.

I use the terms “spouse”, “married” and “married couple” for simplicity but this applies equally to people in a civil partnership.

So, the NRB Trust was developed.  On the death of the first spouse, an amount equivalent to the NRB went into a discretionary trust and the balance went to the survivor.  The surviving spouse could benefit from the trust but, because it was discretionary, the trust assets were not taxed with the survivor’s estate on death.

What happened in October 2007 was that the Transferable NRB was introduced.  This meant that if the NRB was unused on the first spouse’s death, it could be used in the estate of the surviving spouse.

Solicitors did not tell people to rush out and make new Wills to remove the trusts for two reasons:

  • The trust might be needed for other reasons; eg protection of assets for the next generation.
  • The trust could be wound up in favour of the surviving spouse within two years of the first spouse’s death if it was favourable to do so.  This preserved the NRB for the surviving spouse’s estate and it was less costly than making two new Wills. 

From 6 April 2017, the Residence NRB is £100,000.  This will increase in stages to £175,000 by 2020-21.  If, on the second death, both elements of the NRB can be transferred from the first spouse’s death, it results in the “magical” £1 million NRB which has been much talked about.  There are other restrictions, not least a ceiling on the value of estate which can qualify for the Residence NRB.

So, who will be affected?  If the following apply, you should arrange to review your Will: 

  1. Will made before October 2007 at a time when you were married or a post-October 2007 Will which includes a NRB trust.
  2. The Will contains a legacy of an amount equivalent to the NRB and provides for the legacy to go into trust.
  3. You are still married and you and your spouse have combined estates of over £325,000.
  4. You own (or have at some time) a property used as your home.

If this applies, the review should preferably take place before 5 April 2017 in case a new Will is needed.