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Following the introduction of the new Residence Nil Rate Band in April, does your Will still work for you?

Advice Written by Philip Hands 30 Jun 2017

You should therefore review your current will to ensure that it not only meets your current needs but is also tax efficient.

Many people, particularly married couples, still have wills in place leaving a gift of the Nil Rate Band in a discretionary trust with the residue often passing to their spouse or children. Such wills were very common before 2007 when the Nil Rate Band was not transferable between spouses.  This meant that if it was not utilised on the first death, it was lost entirely.

In 2007 there was a change to the law so that married couples can now transfer their unused Nil Rate Band to their spouse on their death. This means that the surviving spouse now automatically has a Nil Rate allowance of £650,000 to use against their estate if the first spouse to die has left everything to them. The change in the law in 2007 effectively removed the need for preserving the Nil Rate Band of the first spouse to die in a discretionary trust.

However, there are still many married couples who have discretionary Nil Rate Band trusts in their wills, either because they have never got around to amending them, are unaware of the change in the law or perhaps have kept the trusts for another reason other than tax. Following the introduction of the new Residence Nil Rate Band, it is now essential that if you have a will which was drafted in this way you have it reviewed by a solicitor, particularly if you will benefit from the new tax allowance. This is because these trusts fall foul of the criteria applied to enable an estate to claim the new allowance, namely that property is left absolutely to a direct lineal descendant. The reason is that property left within a discretionary Nil Rate Band trust is not considered to have been left as an outright gift to a direct descendant.  The deceased person’s estate will then not be entitled to claim the new Residence Nil Rate Band, which will be lost.  The financial ramifications can be extremely costly in terms of tax which will be payable, but which could have been avoided.

Anyone who has a will containing either a Nil Rate Band discretionary trust, or indeed any other type of trust and may need to utilise the new tax allowance, should therefore have their wills reviewed without delay to avoid unnecessary costs and the potential loss of additional tax exemptions.

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