With effect from Tuesday, 9th October 2007 the Chancellor of the Exchequer, in his pre-Budget Statement, has changed the way in which couples can make use of their inheritance tax allowances, known as the nil rate band.

The existing nil rate band of £325,000 has not changed, but now the nil rate band of the first spouse/partner to die can be carried over and added to that of the second spouse/partner. The surviving spouse/partner inherits the nil rate band at the level it is when the surviving spouse dies and not at the level it was after the first death.

Example 1: Husband and wife both make Wills leaving everything to each other. Husband dies 1st May 2007 when the nil rate band is £300,000; wife dies in 2010 when the nil rate band is £325,000. Wife has a nil rate band of £625,000

Example 2: Husband and wife both make Wills leaving £150,000 to children on first death. Husband dies 1st May 2007 when nil rate band is £300,000. The gift to children uses half of his nil rate band – the other half is transferred to wife. Wife dies in 2010 when the nil rate band is £325,000. The wife has a nil rate band of £487,500 ie. £325,000 plus £162,500.

This applies to all existing widows/widowers/civil partners where their spouse/civil partner has already died irrespective of the date of death.

The impact of these changes on couples drawing up their Wills, is that it is no longer necessary to include a Discretionary Will Trust facility in their Wills for inheritance tax benefits.

However, it is still be important to consider such Trusts for other reasons:

  • where couples wish to ensure that on the first death assets pass to children from a previous relationship. A Discretionary Will Trust would protect such assets from a new, second spouse/partner, who may otherwise leave everything to someone else on the second death. Thus part of the estate is preserved for the children
  • after the first death, if the surviving spouse/partner has to go into long-term care, then a Discretionary Will Trust can protect the home from being ‘invaded’ by the local authoity to help pay for the cost of care, by leaving the first spouse/partners share of the house to the Trust.
  • there is also a case for using a Discretionary Will Trust in situations where half the value of the home is worth at least the value of the nil rate band, and is likely to increase by more than the nil rate band over time. The Trust can be index-linked so that on the second death the amount owing to the Trust is more than the prevailing nil rate band at that time. This would reduce the potential inheritance tax liability on the second death

For further information on Discretionary Trust Wills, please contact us now and we will be pleased to discuss these in more detail.