News and views from Lane-Smith & Shindler

The Chancellor announced today that the IHT allowance (or ‘nil-rate band’) has been frozen at £325,000 not just this year but until 2014/15.   This is likely to have a significant impact on will drafting for high net worth clients.  Anyone who has made or changed their will since October 2007 is potentially affected.

Until October 2007 the accepted wisdom amongst solicitors was that for most married couples with joint assets exceeding the IHT threshold every will should include a gift to use up the IHT allowance.  Otherwise, the allowance of the first spouse to die would be wasted and the tax payable on the death of the surviving spouse would be more than would otherwise have been the case.  The gift could be to the couple’s children or into trust (called a ‘nil-rate band will trust’ for obvious reasons).  A trust was usually preferred because the surviving spouse could be a beneficiary of that trust.

With the introduction of the ‘transferable’ IHT allowance in October 2007 the approach changed.  For most married couples, there was no disadvantage if the estate of the first spouse to die passed to the surviving spouse.  The IHT allowance on the death of the surviving spouse would be increased by 100% if the first spouse to die had not used any of their IHT allowance.

A minority of solicitors have continued to extol the virtues of the nil-rate band will trust.  One argument put forward for this is that, if the assets passing in to the nil-rate band trust grow in value at a quicker rate than future increases in the nil-rate band, an overall inheritance tax saving can still be achieved. 

Until today, it was assumed by most solicitors that future increases in the nil-rate band would mean that any possible saving from including a nil-rate band trust in someone’s will would be negligible.  With the announcement that the nil-rate band is being frozen for the next few years however nil-rate band will trusts may again come back into fashion.

Wills incorporating nil-rate band trusts are likely to be especially suitable for elderly couples with joint assets valued in excess of £650,000.  Further details about why such wills are especially suitable for such people can be provided on request.