Following a visit from a new client who had not heard about the transferrable nil rate band legislation introduced by Alistair Darling in October 2007, I thought that it might be useful to have an update and to detail some of the planning implications.
Transferrable nil rate bands are a useful tool to ensure that both nil rate bands available to a married or civil partnership couple are fully utilised, although couples always had the opportunity to exploit both nil rate bands before October 2007 with a bit of forward planning.
All clients should be able to transfer any proportion of the nil rate band not utilised on their spouse’s death. Nevertheless, clients who are widowed and then subsequently remarry could now have the ability to enjoy the benefit of three, or even four, nil rate bands. However, such a favourable position will only be exploited to the full with some degree of forward planning. Without this , the full benefit of transferrable nil rate bands will not be utilised.
Many married couples (or those in a civil partnership) may well believe that discretionary will trusts are no longer necessary, given that the unused portion of the nil rate band on first death can now be transferred an used on the second death. But is this really true? As can be seen from the case study that follows there are sound tax reasons, particularly now that the IHT nil rate band has been frozen until April 2015.
Daniel and Anne were married in the early 1970s, having two children soon afterwards. Sadly, Daniel died in 2007, and Anne remarried Edward, a divorcee. On his death in 2007 Daniel had not utilised any of his nil rate band, leaving everything to Anne. Therefore, she should be entitled to the full nil rate band on her death, plus the full value of Daniel’s transferrable nil rate band.
Anne and Edward are reviewing their wills. They need to carefully consider the wording their wills:
Wording A… an amount equal to the inheritance tax nil rate band at the time of my death less any potentially exempt transfers or chargeable lifetime transfers made by me within seven years of my death…
Wording B… an amount equal to the maximum that could be put in trust that would be wholly chargeable to inheritance tax at the rate of 0%.
The use of Wording A would mean that £325,000 could go into the discretionary will trust. However, by using Wording B, £650,000 could be passed to the discretionary will trust. Edward would still use his full nil rate band on his subsequent death, meaning that three full nil rate bands have been used.
