The last 10 years have seen very significant changes to inheritance tax and recent changes have impacted yet again on the drafting of Wills
Until October 2007, many married couples whose estates exceeded the inheritance tax nil rate band made Wills using a nil rate band discretionary trust legacy on the first death. This enabled the nil rate bands of both to be used and so maximised the inheritance tax saving. Straightforward Wills (leaving the estate to the survivor on the first death and then to the children on the second death), while attractively simple, were not tax efficient, because only the survivor’s nil rate band was available on the second death.
The introduction of the transferable nil rate band in October 2007 was a welcome change. For the first time married couples and civil partners could opt for straightforward Wills without an inheritance tax downside. The nil rate band of the first to die could be claimed on the second death, in addition to the survivor’s own nil rate band.
This change prompted many people to review their Wills. Some chose to replace their nil rate band discretionary trust Wills with straightforward Wills. Others chose to retain the more complex Wills for a variety of reasons and in the knowledge that the terms of the Will could be rearranged following the first death.
What has changed?
The residence nil rate band (RNRB) is a new and valuable additional nil rate band, available to many (but not to all) of those who die after 5 April 2017 and leave a residence to lineal descendants. However, it is not as generous as it might first appear.
The sting in the tail is the taper threshold which reduces or removes the benefit of the RNRB for those with estates over £2 million. For married couples or civil partners with estates close to or over the £2 million level, it may now be preferable to have Wills incorporating a nil rate band discretionary trust legacy on the first death. This can reduce the survivor’s estate and so avoid, or reduce, the effect of taper and preserve the benefit of the RNRB. This may mean reverting to the more complex form of Wills previously relinquished in favour of simplification!
What to do now?
For some of those who opted for straightforward Wills, it may now be time for a rethink. For those who haven’t yet taken tax advice, it’s time to check that your family won’t miss out on this new tax allowance.
The most appropriate form of Will always depends on a person’s particular circumstances, personal and financial, as well as the current tax law and it is important that all matters are considered in the round. The key is to ensure that appropriate Wills are in place and then to keep those Wills under review, to ensure they keep pace with a changing inheritance tax landscape as well as with changing personal circumstances.
If you wish to review the tax-efficiency of your Will, please contact one of our solicitors:
Milton Keynes - Carolyn Bagley, on 01908 247015 or click here to email Carolyn.
Cambridge - Emma Satterly, on 01223 532725 or click here to email Emma.
Northampton - Jane Stebbings, on 01604 463328 or click here to email Jane
London - Francesca Rossi, on 020 7831 8888 or click here to email Francesca.
For more information please read our Why Make a Will and Inheritance Tax guidance sheets.