Two Simple Trusts in Wills that Protect Assets

You may or may not be aware that we all have inheritance tax nil rate bands for our estates on death that when used with two trusts can protect from inheritance taxes and the care fees means test.

£325,000 Nil Rate Band (NRB)

The inheritance tax nil rate band of £325,000 means the first £325,000 of any person’s estate less any ‘potential exempt transfer’ gifts made within the last 7 years is free from inheritance tax.

£175,000 Private Resident Nil Rate Band (RNRB)

The inheritance tax private residence nil rate band of £175,000 means the first £175,000 of any person’s interest in their main private residence is inheritance tax free provided the interest in the property is left to direct line descendants i.e.  a child, grandchild, great-grandchild or great-great grandchild of the deceased where a ‘child’ is defined as bloodline children, step-children, adopted children, and foster children (if the deceased was an appointed guardian or special guardian for a child who was under 18 at that time of death).

• This means a total inheritance tax nil rate band allowance of £500,000 (if you are a property owner) per person.
• If you do not use your allowances on death because you leave your estate to your legally married spouse or civil partner, your allowance of up to £500,000 can be transferred to your surviving spouse meaning the survivor has a total allowance on 2^nd death of £1m.

Do not be fooled by the ability to transfer unused NRB and RNRB.

We suggest this was put in place to encourage people to think they have up to £1m inheritance tax free allowances and therefore reducing the need to anything with your wealth in your Will on 1^st death.   By passing all wealth to your surviving spouse means the survivor now owns all the wealth that can then be included in any care fees means test should the survivor need care.  This means children/grandchildren other loved ones may inherit reduced amounts on 2^nd death if the survivor did need and had to pay for means tested care during life.

Use Will Trusts to Protect Wealth on Death

A.  £325,000 NRB Will Trust – you include a trust inside your Will that places the first £325,000 of your wealth in trust for loved ones (not spouse) on first death but allow your surviving partner to borrow money from the trust when needed.

Result

• £325,000 plus any growth is held in trust for loved ones and is protected i.e., it cannot be included in any care means test for the survivor as it is not part of their wealth.
• Surviving spouse borrows money from the trust that is repayable in life or death meaning the estate is reduced even further for inheritance taxes or care fees.

B.  £175,000 RNRB Property Life Interest Trust or £500,000 (if you combine £175,000 RNRB and £325,000 NRB) into one Property Life Interest Trust

• You change the way you own your main residence from Joint Tenants (where you jointly own the whole property) by severing the joint tenancy to then own as Tenants In Common (imagine drawing a red line down the middle of your property, you own half, and your spouse/partner owns half).
• On 1^st death, you place your share of the property in a Life Interest Trust meaning it is held in trust for loved ones, but your surviving spouse can still use it, live in the whole property for life and even move to another property and simply transfer the trust.

Result

• Between £175,000 up to £500,000 of property value is held in trust for loved ones and is protected i.e., it cannot be included in any care means test for the survivor as it is not part of their wealth.
• As detailed above, the surviving spouse can still use the property, live in the whole property for life and even sell up and move to another property and transfer the trust to the new property.

What Will Trust for You?

• Non-property owners should always have a £325,000 NRB Will Trust in their Will.
• Below £350,000 property value owners (£175,000 share) should consider a Property Life Interest Trust (using £175,000) and an additional NRB Will Trust in their Will to protect up to another £325,000.
• Below £1m property value owners (up to £500,000 share) should consider a Property Life Interest Trust (using £175,000) and an additional NRB Will Trust in their Will for the balance up to £500,000.
• Above £1m property value owners (over £500,000 share) should still consider a Property Life Interest Trust (combining £325,000 NRB and £175,000 RNRB) to protect and place over £500,000 value of their property in trust for loved ones and pay any marginal inheritance tax liability if their share of the property is worth more than £500,000.  Some may baulk at this but a small amount of tax paid to protect 50% of a house worth over £1m must be worth considering.

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