The Trusts that made sense then, but may cost you now

Before this change in the law, the Nil Rate Band operated on a “use it or lose it” basis. Unlike today, any unused allowance could not be transferred to a surviving spouse or civil partner’s estate. As a result, many older Wills included a Nil Rate Band Discretionary Trust.

These Trusts allowed the tax-free allowance to be used by placing assets into Trust. The value held in the Trust would not form part of the survivor’s estate. This created a tax advantage because, without the Trust, the surviving spouse or civil partner would inherit all of the deceased’s assets, but only one inheritance tax exemption would apply. The Trust assets could also be loaned to the surviving spouse, in exchange for a Loan Note, that would be repaid on their subsequent death. This would allow the spouse to receive the estate in full, but with a valid debt on their own estate, which would have the inheritance tax effect as the use of two Nil Rate Bands.

Although the original purpose of these Trusts is now largely obsolete, anyone who has not updated their Will since the change in the law may unintentionally create an unwanted Trust on death.

Thackray Williams were recently instructed to assist with the administration of an estate which initially appeared straightforward. This involved the transfer of residential properties to the relevant beneficiary.

As part of our investigations, we reviewed the deceased's Will and related estate documentation. During this process, we discovered that the Will of our client’s late spouse contained a Nil Rate Band Discretionary Trust. Following the spouse’s earlier death, no professional advice had been sought nor formal administration undertaken in relation to the trust, as it has been assumed that all assets had passed automatically to the surviving spouse.

The properties in question had been owned as tenants in common, meaning instead of the properties passing automatically by survivorship, the share of the properties passed under the terms of the deceased’s will, and were therefore used to satisfy the gift into the discretionary trust.

What began as a simple instruction to transfer assets to the beneficiary quickly became a complex matter involving an unadministered trust, unpaid inheritance tax, unpaid income tax and penalty charges.

Had advice been sought at the outset, a professional would have identified the Nil Rate Band Discretionary Trust clause in the Will and helped the family avoid these unexpected issues.

When reviewing your own Will, or the Will of a late family member or friend, it is important to seek advice on its contents and consider the impact of later changes in legislation. As professionals, our role is to guide you through your own tax planning, and the administration of an estate, so that the outcome is tax-efficient and reflects the family’s wishes.

We offer a 30 minute, free of charge consultation to executors at the outset of the administration process so that any complexities are identified and addressed from the start. If you would like to arrange an appointment with one of our Private Client team, please contact us on 020 8290 0440.