Newspaper article The Journal (Newcastle, England)

Nil Rate Tax Bands in Discretionary Trusts

Newspaper article The Journal (Newcastle, England)

Nil Rate Tax Bands in Discretionary Trusts

Article excerpt

Byline: By Alison Burn

Alison Burn, partner in Ward Hadaway's private client team illustrates how nil rate bands work in discretionary trusts in practice when a spouse passes away

It is common knowledge that inheritance tax savings in wills can be achieved by passing the nil rate band ( the maximum amount you can leave without paying inheritance tax ( into a discretionary trust on the death of the first spouse. But how does earmarking the nil rate band separately in your will work in practice when one of the spouses dies?

Let us take as an example Mr and Mrs Hall. Their house is worth pounds 400,000 and they own this as tenants in common ( each owns half of the property rather than them both owning the whole property. They have savings and investments of pounds 200,000 each and Mr Hall has owned shares in the family company for many years (valued at pounds 150,000). These will attract relief at a rate of 100%.

Mr and Mrs Hall made wills in 2000 which include a nil rate band trust, which comes into effect on the first death. The potential beneficiaries of the trust are the survivor, their two children and any future grandchildren they may have.

Mr Hall died in August 2005. Valuations of all of his assets were obtained and grant of probate was applied for. Mr Hall's will appointed his wife as the sole executor. In his estate there is the half share in the matrimonial home (which was owned as tenants in common), his investments and his company shares, at a total value of pounds 550,000.

At the date of his death, Mr Hall's available nil rate band was pounds 275,000. Mrs Hall is the sole initial trustee and decides to appoint her two children as her co-trustees. Mrs Hall decides that she will need pounds 100,000 of her husband's savings and investments, with the rest passing into the trust. The trustees agree to this. As the company shares attract relief at 100% they also are held on trust for the family as a whole without affecting the remaining value that can be held in the nil rate band trust.

The trustees therefore receive cash assets of pounds 100,000 and the company shares. A further pounds 175,000 needs to pass into the discretionary trust. …

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