Why your current Will could cost your estate £80,000 in tax
From 6th April 2017, the new Residence Nil Rate Band (RNRB) could mean your current Will costing your beneficiaries up to £80,000 in tax-relief. So now is a good time to look at the inheritance tax efficiency of your Will. Mark Williams of the law-firm Amba Legal Services Ltd explains why.
Since 1974, the first of a married couple to pass away has been able to leave their entire estate to their spouse without having to pay inheritance tax. The knock-on effect was that the deceased’s Nil Rate Band (NRB) allowance remained unused.
That is why many Wills used to contain a Nil Rate Band Discretionary Trust (NRBDT) provision. This was a complicated way of ensuring that a person’s estate up to the value set by the NRB, currently £325,000, was ‘banked’ into a trust upon their death, with the potential to make huge inheritance tax savings when their surviving spouse or partner later died.
So what has changed?
Since 2008, it has been possible to transfer any percentage of unused NRB to the survivor of a marriage; e.g. if the husband dies and passes all assets to the wife, the NRB of his wife would be doubled when she passes away. This effectively removed the need for ‘banking’ the NRB through a discretionary trust. And because the administration of an NRBDT can be expensive, from 2008 it may have been beneficial to remove the provision from existing Wills.
But when the new RNRB comes into force in April 2017, where a residential property is involved the inclusion of an NRBDT could actually be detrimental in tax terms.
The RNRB will allow an additional tax-free £100,000 per home-owner to apply to estates where a residential property is directly being passed onto one’s children or grandchildren. This will increase by a further £25,000 every year until 2020. As a result, each person will be able to pass on £500,000 tax free and potentially £1,000,000 if they are the second in a married couple to pass away.
But, where an NRBDT features in an existing Will, the terms of the trust mean its assets are not being left directly to children or grandchildren and the extra RNRB allowance could be lost causing your beneficiaries to pay up to £80,000 inheritance tax.
So those currently with an NRBDT in their Will have two good reasons to revisit their wishes:
- avoiding unnecessary costs;
- potentially losing out on further tax exemptions.
Because every situation is different, the best way to ensure your Will is still working for you is to seek the appropriate legal advice.
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