Inheritance tax savings through your will

A common tax planning vehicle for married couples or civil partners whose individual estates exceed the tax free amount that can be left on death (known as the 'nil rate band' or 'NRB') is a nil rate band discretionary Will trust.

The purpose of such trusts is to leave assets to the value of the NRB (currently £300,000) to the beneficiaries other than the surviving spouse or civil partner in order to minimise the inheritance tax (IHT) payable on the death of the survivor of the couple. Anything left to the spouse/civil partner is tax free but on the death of the survivor anything over his or her NRB is taxable at 40 per cent if left to a non-exempt beneficiary such as a child.

NRB Will Trusts ensure that assets to the combined NRB, that is, £600,000, are passed down tax free rather than just the NRB of the surviving spouse/civil partner. However, few people have sufficient assets to leave the NRB amount outright to beneficiaries other than their spouse/civil partner, as to do so would leave the spouse/civil partner short of income.

In some cases it is often necessary to use the couple's home to fund the trust and the trustees are given power under the trust to accept an IOU from the surviving spouse/civil partner or impose a charge so that all the assets of the first to die, including his or her share of the home can be transferred to the surviving spouse/civil partner. On the death of the survivor his or her estate will be reduced by the outstanding loan, thus achieving the tax saving aim.

The beneficiaries of the NRB discretionary trust are usually the surviving spouse/civil partner and other family members - often children and remoter issue. The surviving spouse/civil partner is usually one of the trustees who have discretion over which of the beneficiaries should benefit from the trust.

Example 1

  • Mr X dies first.
  • Entire estate £425,000 to Mrs X tax free.
  • Mrs X dies.
  • Mrs X leaves an estate of £200,000 plus the £425,000 inherited from Mr X - a total of £625,000. Everything above the NRB of £300,000 taxed at 40%: a tax bill of 130,000.

Example 2

  • Mr X dies first.
  • NRB Discretionary Trust (£300,000). Residue £125,000 to Mrs X.
  • Mrs X dies.
  • Mrs X leaves an estate of £200,000 plus estate inherited from Mr X of £125,000. Everything above NRB of £300,000 taxed at 40%: a tax bill of £10,000.