Date:  26 June 2008

DISCRETIONARY WILL TRUSTS

Under present legislation, both husband and wife can each distribute on their death up to £312,000 (for the 2008/2009 tax year) of their estate to any individual and there is no Inheritance Tax liability due on this amount (assuming no previous gifts have been made for Inheritance Tax purposes). 

Prior to the Pre-Budget Announcement of October 2007, a simple solution to ensure both nil-rate bands were used was to draft Wills so that on the first death, the testator utilises part or all of the “nil rate band” by passing this amount into a Discretionary Trust. This means that the remaining estate passing to the surviving spouse has been reduced for Inheritance Tax purposes.  However, the Trustees can pay the capital and income within the trust to a number of potential beneficiaries of one’s choice.  The surviving spouse can be one of these beneficiaries, which means the Trustees can pay from the trust both capital and income to the surviving spouse.

The overall effect is that on the second death, the estate has been reduced for Inheritance Tax purposes but in the meantime, the surviving spouse has not been left short of funds.  On the death of the surviving spouse the trust can be wound up and any remaining assets passed over to the children.

However, the problem faced is what assets can pass into a discretionary trust.  If the first spouse to die has sufficient cash assets available to pass the nil rate band into the discretionary trust, then this should not present a problem.  However, this is often not the case and it could become complex if a share of the family home had to be used as a part of the tax-planning exercise. 

Transferable nil rate band

However, it should now be possible for the estate of the surviving spouse to make use of the unused nil rate band of the first spouse to die.  If the surviving spouse had had more than one spouse, then the unused proportion of the nil rate bands of all previous spouses can be utilised, providing they do not exceed one nil rate band in total.

In many respects, this now achieves the same result as the nil rate band discretionary trust did.  However, there can still be advantages in including nil rate band discretionary trusts in Wills.

If an asset is put into a discretionary trust, then as long as its value at that time does not exceed the nil rate band, it does not matter if it increases in value.  On the other hand, if the value of the property was not to increase by as much as the increase in the nil rate band, then the surviving spouse’s estate would be worse off by making use of the discretionary trust than if they had instead relied upon the transferable nil rate band. 

One further factor to be borne in mind when considering the benefits of the transferable nil rate band is the fact that evidence will have to be provided as to what actually happened to the assets of the first spouse to die.  The Revenue would expect the Estate to provide evidence that the benefit of the full nil rate band passed to the surviving spouse.  It is understood that in the case of spouses who died a number of years ago, the Revenue will not require exhaustive details to be provided.  However, in the future, the Revenue will require full details.  As well as a copy of the Will and the grant of probate, they will also require a copy of the death certificate and of the marriage certificate.  There is always the possibility that a deed of variation of the Will was executed within two years of the date of death and this would not be a matter of public record.  It may also be necessary to provide copies of valuations of assets passing on the death of the first spouse to die, and of any life time gifts which had been made.  It is important for families, and their professional advisors, to ensure that much more information is now retained than had previously been required. 

Other issues

There are also other reasons why discretionary trusts might be attractive, quite apart from tax planning reasons.  These can be summarised as follows:-

Conclusion

This is a complex area of law and the optimum solution for you will depend upon your and your family’s personal circumstances.

Roger Williams