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A Tax Efficient Will:

Do you really want to give all that money to the taxman?

You will have heard this before, but this is as simple a guide to basic Inheritance Tax (‘IHT’) as we
can come up with!

It goes without saying that you should take full and specific advice in relation to anything you see
on this website, but this is doubly so for tax advice. This is a really brief explanation of the rules
generally, but there all kinds of rules, regulations, loopholes and myths that HMRC use to govern
this.

These Wills were much more useful before the rules changed in October 2007. But they can still
fulfil a purpose.

Before October 2007, the rules were that if you passed away leaving more than the IHT threshold for a single person you would be taxed. This limit is called the Nil Rate Band (‘NRB’), because you pay zero tax on that band. This limit changes from time to time, but is currently £325,000 per person.

But, if you left all of your estate (be it £1 or £10,000,000) to your surviving spouse or civil partner then you should not have to pay tax on the first death.

Sounds ok, doesn’t it?

But, what happens when the surviving spouse or civil partner dies? Assuming they also have their own assets, and then have the deceased assets on top of that (let’s say £999,999), it usually meant that they died without being able to leave anything to a spouse or civil partner (because, well, they’re dead…). So anything they left over the NRB was taxed.

What a lot of people would do to minimise this problem was to have a Tax Efficient Will, which would leave “such sum as is at the date of my death the amount of my unused nil-rate band for inheritance tax” – i.e. the NRB – in a Discretionary Trust*. This amount would be passed into the Discretionary Trust and use up the NRB for the deceased. The Trust would generally be used to look after the surviving spouse or civil partner financially too. And then everything else would be passed to the surviving spouse.

This probably sounds quite similar to not having the Tax Efficient Will? But it’s not. Importantly, the amount in the Discretionary Trust, let’s say £325,000, has been removed from the surviving spouse or civil partner’s estate for the 2nd death. So there should be significantly less tax to pay on the 2nd death.

So why are we telling you the old rules?

Unfortunately it’s the only way we can explain what happens now.

In October 2007, the Transferrable Nil Rate Band (‘TNRB’) became available. What this means is that so long as the surviving spouse or civil partner died after 9th October 2007 , then any of the NRB that the first deceased did not use could be transferred to the surviving spouse or civil partner. This helped because most couples have assets split unequally among them.

As an example, let’s say a husband has the house in his name worth £300,000 and some cash totalling £50,000. And his wife just has cash worth around £50,000. Under the old rules, if the wife died first and left it all to her husband, then he would be worth £400,000 and would have to pay tax on anything over the NRB when he died.

Under the new rules, the husband could claim the difference between his wife’s £50,000 and her NRB, and add it to his NRB. If the NRB was £325,000 at the time of both deaths, under the new rules they would have no IHT to pay.

 

So what happens if you have a Tax Efficient Will?

If the first deceased left their NRB in the Discretionary Trust, they would have used all of their NRB and so the surviving spouse or civil partner would only have their standard NRB to play with anyway. On the face of it there is nothing to be gained by the Tax Efficient Will.

 

Why should you still have one then?

I suppose the simplest answer is that HMRC are fickle, fickle people! If the rules change back again tomorrow, and the TNRB ceases to exist, then you will have the old problems again.

Another reason however could be that you are not married to your partner.  In that case you could use the old Discretionary Trust to minimise your IHT liability whilst also providing for your partner.

And on top of that, the Discretionary Trust is a similar way of protecting assets as the Life Interest or Property Trust Wills. The surviving spouse or civil partner could be looked after by the Trust, but the assets in the Trust should not be lost to care fees (although again you must take specialist and subjective advice on this), and if the surviving spouse or civil partner loses their mental capacity the monies will not be locked away in the Court of Protection.