Many UK Wills contain provision for a nil rate band trust. However, in October 2007 this became unnecessary with the introduction of a law allowing transfer of the nil rate band between the estates of spouses.
As such, if your Will still contains provision for a nil rate band trust, it is advisable to instruct a Wills solicitor to write a new Will, thereby revoking the earlier document. However, in the event that you fail to do this is it is still possible for the nil rate band to be unwound upon death of the testator. There are also some circumstances when it still may be advisable for your will to contain provision for a nil rate band trust.
The nil rate band
The nil rate band is the portion of a testator's estate that receives zero percent inheritance tax. As it stands the inheritance tax threshold is £325,000; meaning that any portion of an estate exceeding this nil rate band attracts a tax of 40%.
Under the most recent laws regarding inheritance tax, a smaller proportion of UK estates will qualify for inheritance tax after 5 April 2017. Furthermore, from 5 April 2021, certain estates valued at £1 million could be immune from the tax.
However, although this is undoubtedly a positive step for most, for others the changes will actually bring disadvantages. For example, couples without children will actually be subject to larger taxes following the changes of 5 April 2017. Read on to discover how this might affect your will and your estate.
The new residence nil rate band
If you die later than 6 April 2017 and wish to pass the value of your home onto your children or grandchildren, your estate will qualify for the additional inheritance tax free residence nil rate band. This new nil rate band will begin at £100,000 for the 2017/18 tax year and move up by £25,000 increments each tax year, ending at £175,000 in 2021.
However, this is not to the advantage of childless couples, because to qualify for the new residence nil rate band, couples must leave the property to their children or their children's children.
The existing inheritance tax nil rate band
This new residence nil rate band, which was announced by Chancellor George Osborne as part of an emergency budget in 2015, works together with the existing inheritance tax nil rate band of £325,000.
In effect, this means that a person may leave up to £500,000 to his or her beneficiaries inheritance tax free.
The spouse effect
Where one of the two parties to a marriage dies, it is possible to "pass on" the inheritance tax nil rate band to the surviving partner. As such, the estate of the surviving spouse will effectively benefit from four nil rate bands. This is two times the inheritance tax nil rate band of £325,000 (£650,000) in addition to two times the residence nil rate band of (£350,000). In effect, this means that post 2021 it may be possible for some testators to pass on £1 million without attracting the 40% inheritance tax rate.
Very high value estates
However, estates worth in excess of £2 million will only be able to claim a fraction of the residence nil rate band. Furthermore, where the value of the estate exceeds £2.7 million no residence nil rate band will apply.
Nil rate band trusts
For the most part it is no longer necessary for wills to provide for nil rate band trusts. However, in certain cases ensuring a nil rate band trust may protect assets from business creditors, divorce settlements or the financial fallout of making nursing home arrangements.
Furthermore, assets may sometimes increase in value faster than the nil rate band or may help protect intended ultimate beneficiaries from the choices of a surviving spouse.
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