For many people, the arrival of the transferable Nil Rate Band in 2007 meant that IHT planning using Wills no longer required a Discretionary Trust for the first of a married couple to die. However, the situation changes if one or both parties to the marriage have previously been widowed. In these cases, using an IHT band Discretionary Trust may help to maximise the available IHT Nil Rate Bands.
Supposing John and Sue are married, both for the second time. John is widowed and Sue divorced. John’s first wife had an unused Nil Rate Band. If John dies first, his executors can claim his first wife’s unused relief giving John’s estate a Nil Rate Band of £650,000. If Sue dies first, the amount of unused relief his executors could claim would be restricted to 100% of the Nil Rate Band applicable at his death. In effect, this means that his first wife’s relief would be wasted.
To maximise the relief available, John could leave a nil rate sum on Discretionary Trusts for the use of Sue and their family. His first wife’s Nil Rate Band would be applied against the gift to the trust and the rest pass to Sue who is spouse exempt from tax. John’s own Nil Rate Band has not been used. On Sue’s death her executors could claim John’s unused relief and increase her Nil Rate Band by 100%.
If Sue dies first, her Will should leave a sum equivalent to the Nil Rate Band to a Discretionary Trust, with the residue to John. Although her tax relief has been used up, John’s executors can use both his and his first wife’s unused relief on his estate.
Hence in certain marital circumstances and using the above example, three Nil Rate Bands can be used, which currently amounts to £975,000.