ESTATE PLANNING AND THE TRANSFERABLE NIL RATE BAND

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ESTATE PLANNING AND THE TRANSFERABLE NIL RATE
BAND

• John Woolley
• Technical Connection

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The dilemma for Daniella Dunwoody

• Husband died on 5 February 2008
• He established a NRB Will Trust
• Is this the best approach in the new TNRB
  world?
• Can existing planning be undone after the first
  death?

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• A step back in time
• The position before 9 October 2007

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HUSBAND/WIFE WILL PLANNING PRE TNRB

• IHT planning for husband and wife (or civil
  partner)
• Pre 9 October 2007 advice was use both nil rate
  bands if possible
• Potential saving 124,800 plus growth outside
  estate after first death

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POTENTIAL PROBLEMS OF USING IHT NRB ON FIRST
DEATH BY OUTRIGHT GIFT

• Loss of control over the assets donee has
  complete control
• Loss of income and access to surviving spouse

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SOLUTION

• NRB Will Trust
• Spouse a potential beneficiary
• Spouse one of the trustees
• Different approaches for cash/residential property

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NRB TRUSTS
CASH / INVESTMENTS

• Discretionary Trust
• Power to grant interest-free loans

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NRB TRUSTS
PROPERTY
CASH
Charge or IOU Discretionary Trust

• Discretionary Trust
• Power to grant interest-free loans

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NRB TRUSTS
PROPERTY
CASH
Charge or IOU Discretionary Trust

• Discretionary Trust
• Power to grant interest-free loans

Property and cash can be held in same trust
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CASH AND NRB TRUSTS

• Investment advice needed trustee investment
• SP Bonds
• - non-income producing
• - tax free switching
• - 5 withdrawal facility
• Growth OEICs
• - limit assessable income
• - use trustees annual CGT exemption (4,800)
• - 18 CGT on excess

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NRB TRUSTS

• This planning option still exists!
• but now its not quite so simple because.

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TRANSFERABLE NRB (TNRB)

• Pre-Budget Report 2007
• The new world of first death planning for married
  couples/civil partners
• Applies to all second deaths after 8 October 2007

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INHERITANCE TAX TRANSFERABLE NRB

• Husband and wife effectively have COMBINED nil
  rate band of 624,000
• Can use up to 312,000 on first death
  OR transfer percentage not used to survivor for
  use on second death
• NOTE - Known increase of nil rate band to
  350,000 in 2010/11

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EXAMPLE BILL AND HILARY
Bill Dies on 1/12/08 when nil rate band
312,000. Leaves all estate to Hilary (wife) No
IHT (spouse exemption) Hilary dies on 1/12/10
when nil rate band 350,000 Hilary is entitled to
a 700,000 nil rate band
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EXAMPLE JOHN AND GEORGINA
John Dies on 1/12/08 when nil rate band
312,000. Leaves 156,000 to children, balance of
estate to Georgina (wife) No IHT but uses 50 of
NRB Georgina dies on 1/12/10 when nil rate band
350,000 Georgina is entitled to a nil rate band
of 525,000 (150 of 350,000)
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TNRB OTHER IMPORTANT POINTS

• Applies on second deaths from 9/10/07
• Can transfer nil rate bands of spouses who died
  before 9/10/07
• Can only transfer one nil rate band however
  many spouses you have had in past
• LPRs make election within 2 years of second
  death special rules if LPRs of first to die
  didnt claim TNRB
• TNRB can only be offset against survivors
  estate on death not lifetime gifts within 7
  years of death

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IMPLICATIONS IN PLANNING

• Impact on IHT calculation on death of
  widow/widower
• Review existing Will arrangements use NRB or
  not?
• Review existing Will Trust clauses to make sure
  they meet testators objectives
• eg. one NRB or all NRBs available

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DANIELLA DUNWOODY
1m
Mr D
Mrs D
500,000 1,000,000 1.5 million Potential
IHT 475,200
NRB Trust
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DANIELLA DUNWOODY - POSSIBLE PLANNING ACTION

• Keep husbands discretionary Will Trust or
• Wind up husbands discretionary Will Trust or
• Trustees appoint on trusts that protect assets
  but retain TNRB

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• The action to take depends on
• Daniellas answer to 7 important questions

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THE IMPORTANT QUESTIONS (1)

• Was your husband married before and did his
  former wife predecease him?
• If so, was he entitled to any TNRB from his
  first wifes estate?

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TNRB MAXIMUM TRANSFERABLE 100 OF NRB

• Maximum transferable 100 of NRB
• Maximum applies irrespective of number of
  previous spouses
• Divorced spouses are ignored
• If married person already has entitlement to
  TNRB, use it or lose it

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ALL TO SPOUSE
1
W
100 TNRB to husband
All estate
H
W2 2 NRBs 624,000

• H leaves all assets to W2
• W2 only gets 100 TNRB
• H should use NRB on first death otherwise a
  NRB wasted

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DWT, WITH BALANCE TO SPOUSE
W
100 TNRB to husband
1
W2 still 2 NRBs 624,000
H
Balance
312,000
Discretionary Will Trust
H NRB available 624,000 Used under
will 312,000 Transferable to
wife 312,000
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TWO NIL RATE BANDS EACH?!

• Second marriage of BOTH current husband and
  wife
• Previous spouses both dead

H
W
624,000
624,000

• Use all 624,000 on first death

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THE IMPORTANT QUESTIONS (2)

• Does your husband have children from a previous
  marriage?
• If so, even if
• divorced from first wife
• or even if no TNRB from first wife
• may wish to protect assets for children from
  first marriage by using Discretionary Will Trust

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THE IMPORTANT QUESTIONS (3)

• Are you concerned over the Local Authority charge
  for provision of care after first death?
• Probably not given size of Daniellas assets
• Other cases DWT gives more protection for
  survivor because
• - surviving spouse inherits less and so
  taxable estate reduces
• - Valuation of 50 interest in property
  reduced

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THE IMPORTANT QUESTIONS (4)

• Is the legacy on first death to Will Trust, cash
  or investments (ie rather than property)?
• If so, will the trustees be making interest free
  loans to surviving spouse?
• Loans are capital not income in survivors
  hands
• Loans repayable on borrowers death can reduce
  IHT on survivors estate
• Care Phizackerley decision (S.103 FA 1986)

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THE IMPORTANT QUESTIONS (5)

• Will you save more IHT on survivors death by
  using TNRB or using Discretionary Will Trust?
• Factors to consider -
• Likely growth in value of assets
• Likely growth in NRB
• NRB goes to 350,000 in 2010/11
• Change of Government increase in NRB?
• Health of survivor

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THE IMPORTANT QUESTIONS (6)
Will survivor make lifetime gifts?
TNRB
Husband
Wife

• Lifetime Gifts
• Survive 7 years no IHT 2 NRBs available on
  death
• No CGT if inherited assets used
• Care GWR/POAT if access is required
• NB Cannot offset TNRB against IHT on lifetime
  gifts

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Alternative planning
Husband
Discretionary Will Trust

• No 7 year survival
• No GWR/POAT if widow a beneficiary
• No extra NRB for widow

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THE IMPORTANT QUESTIONS (7)

• Is asset protection for next generation to be
  implemented on first death?
• Desire on first death to protect assets for
  next generation beneficiaries
• Protect against divorce/bankruptcy of
  beneficiaries
• Establish Discretionary Will Trust on first
  death

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THE OPTIONS FOR DANIELLA

• Leave matters as they are if any of the
  circumstances apply
• Change the position by the trustees redirecting
  all assets to Daniella absolutely
• Change by trustee redirection so that they get
  the best of both worlds

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OPTION 1 LEAVE MATTERS AS THEY ARE

• No change to Will Trust
• Did deceased have a previously deceased
  spouse?
• If so, check wording in Will matches
  requirements
• In particular, is a more precise definition of
  nil rate band needed?

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OPTION 2 REDIRECTION TO DANIELLA ABSOLUTELY

• Absolute and irrevocable appointment by
  trustees to Daniella
• Appointment within 2 years of death/start of
  trust (but NOT in first 3 months of trust)
• S144 IHT Act 1984 disposition treated as
  occurring under Will
• CGT? No option to use probate value of assets

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EXISTING WILL INCLUDES DISCRETIONARY TRUST
Discretionary Will Trust
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EXISTING WILL INCLUDES DISCRETIONARY TRUST
Spouse exemption
W
2 years
Discretionary Will Trust
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EXISTING WILL INCLUDES DISCRETIONARY TRUST
Spouse exemption
W
2 years
Discretionary Will Trust

• If discretionary trust, trustees can appoint
  benefits absolutely to spouse
• If appointment within 2 years, treated as made
  by deceased
• NRB of husband NOT used

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OPTION 3

• Using trust on first death for protection but
  without using NRB
• The Best of Both worlds

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OPTION 3 THE BEST OF BOTH WORLDS
POWER OF APPOINTMENT TRUST IIP TO WIDOW
H
WIDOWS DEATH CAPITAL CHILDREN
TRUST
Widow has IPDI so spouse exemption applies
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OPTION 3 THE BEST OF BOTH WORLDS
POWER OF APPOINTMENT TRUST IIP TO WIDOW
H
WIDOWS DEATH CAPITAL CHILDREN
TRUST

• Appointment to children whilst widow alive
  PET
• 7 year survival drops out

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• But a Will Trust already exists!

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Appointment by trustees on flexible life interest
trusts for spouse
THE BEST OF ALL WORLDS CONTROL TNRB AND ABILITY
FOR SURVIVOR TO MAKE PETs
Discretionary Will Trust

• Widow for life
• Power of appointment

Trustees appoint within 2 years of death (s144
relief)

• IPDI So full transferable NRB available
• Later PETs on absolute appointments to children

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TNRB A NEW OPPORTUNITY FOR ADVICE

• Review Wills of married couples
• Where trust appropriate advice needed on
  trustee investment
• Still scope for quality IHT advice
• Care with IHT calculation for widow/widowers

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