Will-based inheritance tax planning is very limited. It is arguable if a person has left their inheritance tax planning until their death they have left it too late and more planning needs to be completed in a persons lifetime. This isn’t to say that there is no Will-based inheritance tax planning, however this is mostly limited to drafting the Will to ensure that the maximum benefit can be obtained from the reliefs and exemptions that apply on death.
Spousal Exemption and Transferable Nil Rate Band
Anything left to a spouse or civil partner by a Will is free of inheritance tax. Should the testator have also not used their nil rate band (NRB) in full, the unused NRB is available to be transferred and claimed on their surviving spouse’s death.
When drafting a will, it is advisable to ensure that the spousal exemption applies if possible. For example, if trust planning is being considered for the spouse, using a life interest or FLIT over a discretionary trust.
Any gifts to a UK based charity are free of any inheritance tax. Furthermore, if a testator leaves 10% or more of their net estate to charity, the rate of inheritance tax will be reduced from 40% to 36%.
Residence Nil Rate Band
The Residence Nil Rate Band (RNRB) is a relief for inheritance tax that is available where the testator leaves their share of their home to their children or other beneficiaries treated as descendants of the testator. The current value of the RNRB in this tax year is £150,000 but this will increase to £175,000 in the 2020-21 tax year and will increase in line with inflation in the following tax years.
In short the RNRB does appear simple but in its detail it is complicated, particularly when it comes to trusts, and there are a number of pitfalls that could cause RNRB to be lost or not fully utilised.
An example of this would be that leaving a gift to a child that is contingent on them reaching an age of 25 or under will be either a bereaved minor’s trust or a bereaved young person’s trust. If the testator’s home is left to a bereaved minor’s trust or a bereaved young person’s trust, the RNRB will apply to that gift. However, a gift to grandchildren that is contingent on them reaching any age will be a relevant property trust which will not qualify for RNRB.
Should the testator’s property form part of a Flexible Life Interest Trust on their death, this could limit how much RNRB could be applied. We examined this in more detail in a previous article.
Business Property Relief
Business property relief (BPR) is a relief from inheritance tax for certain business assets. When its conditions are met, the value of gifts of the business assets are reduced for inheritance tax purposes by either 100% or 50%.
If BPR is available over a business, the Will should be drafted to take full advantage of this. For example if the intention is that the business is sold, a direction to sell the business should not be included in the Will as this will mean that the business is subject to a binding contract for sale and BPR will not be available.
If the client is married and they are considering letting their spouse benefit from the business they may instead consider a business property relief trust to benefit the spouse rather than leaving to them outright to protect the surviving spouse if the business should lose its BPR between first and second death.
Nil Rate Band Discretionary Trusts
NRB Discretionary Trusts still have some inheritance tax benefits for unmarried couples and remarried widows.
Unmarried couples do not benefit from the transferable NRB or spousal exemption and NRB Discretionary Trusts allow them to fully utilise both NRBs. A remarried widow may use a NRB Discretionary Trust to fully benefit from their additional NRB from a previous marriage. For more information on this, please see our previous article.