Over the past twenty years or so we have made many wills for married couples which included nil-rate band discretionary trusts. These have been a tried and tested way of achieving dramatic savings in Inheritance Tax. Up to 8th October 2007 you could save up to £120,000 in Inheritance Tax by making your will in this way.
Everything has changed as a result of the Chancellor's Pre-Budget statement on 9th October 2007. As a result there is now very little point in making nil-rate band discretionary trust wills. If the first spouse to die leaves everything they own to the survivor, when the survivor subsequently dies they will now get the benefit of the nil-rate band which belonged to the first to die without having had to have made discretionary trust wills.
In fact, you will now potentially be better off as a result of the new law, since the unused nil-rate band of the first to die will be passed to the survivor at the amount applicable to the date of death of the survivor, which may be higher than that applicable on the first death. By way of example, the current limit of the nil-rate band is £312,000, but an increase to £325,000 for deaths on or after 6th April 2009 has already been announced.
When we made nil-rate band discretionary trust wills we always included a power to allow the trustees to pay over or "appoint" the entire trust fund to the surviving spouse. If the trustees use this power within two years of the date of death of the first spouse to die then for Inheritance Tax purposes you will be back in the position you would have been in had you just left everything outright to the survivor in your will, so you will be able to take maximum advantage of the new law.
So there is no need to change your will, unless you would like to take the opportunity to simplify your will, or if there are other changes which you wish to make. The nil- rate band discretionary trust can still be useful for other purposes, e.g. to protect assets against possible future liability to pay care home fees or to provide for children by a previous marriage.
If you made discretionary trust wills and the first spouse has already died, as long as the date of death was less than two years ago the trustees should consider using the power of appointment referred to above to take full advantage of the new law. If you made discretionary trust wills and the first spouse died more than two years ago the tax saving will now be less than you would have saved if you had done nothing at all. If you may have lost out as a result of this very abrupt and unexpected change in the law you may wish to consider writing to your MP to complain!
If you would like to discuss either changing your wills or taking action in respect of an existing discretionary trust please ring us for an appointment.
