UHY Ross Brooke Chartered Accountants

Problems with old Wills

accountant for wills and IHT planning
Michael Brooke

Concerning Wills created before 9 October 2007, the nil rate band (NRB) was often wasted when assets passed entirely to the surviving spouse. This potentially would cost an extra £140,000 of IHT so wills were drafted before that date to either give away assets to the value of the NRB or to transfer into a discretionary trust with the surviving spouse also as a beneficiary.

By Michael Brooke

Modern wills now no longer need to do this as we have the transferrable NRB enabling the surviving spouse to effectively take over the NRB of the first to die. This is far simpler and potentially means that estates on the second death up to £650,000 are free of IHT and up to £1m if there is also residents NRB also to claim.

However, wills are not always updated and often the NRB discretionary trust comes into play. Is this necessarily a bad thing? A NRB Trust may still be an idea, for example:

  • To secure agricultural or business property relief
  • To reduce the value of the estate of the second spouse in order to maximize RNRB
  • Care fee planning
  • General benefits of Trusts
  • Generally, though, a Will drafted with a NRB trust will cause additional work which can best be avoided by drafting a modern will during the testators lifetime.

Where this is not done then we have the following options in the estate of the first to die:

  • Changing the terms of the trust or appointing the whole amount to the surviving spouse within two years of death. Under IHTA 1984 s 144 this may then act as if the trust had never been.
  • Appointing assets to the trust and running it properly with the associated costs until the second death.
  • Creating a debt on the estate of the first to die and pay off the debt when the surviving spouse dies plus interest. This does create more professional fees and potentially tax.
  • Ignore everything or forget what was done in the estate of the first to die with no papers from that time being found.

It is not uncommon to discover on the death of the surviving spouse that nothing was done to create the NRB trust and that the surviving spouse just took the assets and house. This, surprisingly, is not fatal!

There are two possible outcomes:

  • If the surviving spouse took all the assets it could be argued that the Trustees had decided to appoint the assets within 2 years and that they may have made an informal decision to do so. HMRC would probably accept this if supported by the facts and thus the transferrable NRB is available to the surviving spouse.
  • The alternative possibility is that the trust does exist and the personal representatives of the first to die have a claim on the assets of the survivor plus interest. This will probably prove inconvenient.

This all does depend on the facts of the case and as always, it pays to take professional advice.

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If you would like to reduce your tax liability and help your dependents, please do get in touch with our experts. We can provide many services relates to inheritance tax planning.

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