The new transferable nil rate band (NRB) allowance for spouses and civil partners has been heralded in the press as a solution to the worst of the inheritance tax (IHT) problems suffered by 'Middle England', but the NRB trust remains a valuable tool in the tax planning armoury.
In the past, with a £300,000 NRB and a 40% IHT rate, couples who did not have Wills that made full use of the NRBs of both spouses (or civil partners) were doing the equivalent of making a gift of £120,000 to the Exchequer. Where the second death happens on or after 9 October 2007, however, the balance of any NRB not used on the first death can be taken into account on the second death, irrespective of how long ago the first occurred. This will be welcome for those who die without Wills, or who have made extremely simple Wills that effectively made that £120,000 gift to the Revenue.
So have those who went to the trouble and expense of a carefully drafted Will that included a NRB trust been wasting their time and money? The answer to that question is quite clearly 'no': it will often be much better to have a NRB trust in a Will than to rely on the uncertainties of the transferable NRB. Perhaps most importantly it gives a choice, when the time comes, as to whether to retain the trust and its possible advantages, or go instead for the simplicity of the transferable NRB allowance. Just one of many factors is that the investment performance of the NRB may well outstrip the possibly parsimonious increase in the IHT NRB over the same period, thus giving a larger taxfree slice.
Looking ahead to Wills to be made in the future, proper strategic estate planning may succeed in reducing the IHT bill on death by far more than just the £120,000 that can currently be achieved by the sticking plaster of the transferable NRB allowance.