Putting trust clauses in wills can be advantageous despite the residential nil-rate band, as Paul Wilcox explains.
Making a will is the cornerstone of retirement planning, but many do not realise how wills can be a vital tool in the protection against punitive inheritance tax (IHT) armoury.
The traditional use of the discretionary will trust (clauses within a will to create a trust on death to hold certain defined assets) was primarily to permit the first spouse to die to use their nil-rate band (NRB) for IHT.
Rather than allow it to go unused – and the survivor then suffer unnecessary extra IHT on the second death – a trust protected gift on the first death was a good idea.
Since October 2007, when the concept of transferable NRBs first appeared, this expedient has become far less important. But such trust clauses have remained in many peoples’ wills since then, either to achieve other outcomes or because they were, at worst, not damaging.
Residential nil-rate band
With the additional residential NRB (RNRB), the inclusion of a will trust provision can now be disadvantageous.
This is because the RNRB applies only to a deceased’s direct interest in a residential property, which has been their residence at some point and is included in their estate, and is left to one or more direct descendants on death.
Having a property held in a trust will make the extra allowance ineffective and potentially lead to an unnecessary charge to IHT.
But this is the case only for certain estates within a defined value range (less than £2m) and for properties also within a (different) defined value range – in excess of the NRB. Other estates will not be affected one way or the other.
We have former chancellor George Osborne to blame for making everyone’s life more complex. Many years ago, he promised the electorate he would raise the personal NRB to £1m.
Instead of a £1m NRB, which was a justifiable and worthy, the combination of the transferability of the £325,000 NRB and the £175,000 enhancement for certain properties can result in the second to die benefiting from a £1m NRB (two standard and two residential uplifts).
If a client’s estate exceeds £2m (which strangely even includes exempt assets) in value, they start to lose the RNRB and are back to £325,000 or £650,000 as a couple.
The RNRB applies only to property, so the client will not get it if their estate is taxable but their property is worth less than £325,000 for an individual or £650,000 for a couple.
Trust clause use
Are there other reasons for putting a trust clause in a will? Yes there are and, of course, you do not have to include the client’s share of a property in a will trust, which resolves the RNRB issue.
The client may have financial or other assets they cannot, or do not wish, to realise before they die and/or do not wish to gift prematurely either. But they may want those assets to be dealt with very carefully and precisely in line with their wishes once they do die and thereafter.
The client may want their widow/widower to continue to benefit from income from their assets until they die and then the capital to pass to particular children – possibly children from a previous marriage and not stepchildren from your current marriage.
There are a whole range of issues which can be more satisfactorily dealt with by a carefully worded trust and letter of wishes than simply by leaving an absolute legacy.
There is a great deal of hot air being expended at the moment about will trusts, but they can be very useful.
Possibly more important, remember that the personal NRB of £325,000 can be used at any time to make gifts into a flexible discretionary trust and when you pass the seventh anniversary you can use another NRB all over again.
Like most 70-year-olds, if clients live 15 or more years, they can use three sets of NRBs and move £1m out of their taxable estate and ensure there is no IHT payable on it. That is how to really benefit from Osborne’s illusory £1m allowance.
Paul Wilcox is chairman of The WAY Group
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