I am after a solution to a problem that arises when a couple own unequal shares of the marital home & differing amounts of personal assets.
The couple each have children from a previous marriage and wish to create life interest trust over the property with the residue going direct to their children. The effect is that the husband’s NRB would be fully used on first death but the wife’s would not. In fact the wife’s entire assets are valued under £500,000.
The apportionment of the RNRBs & NRB on second death between the free estate and the trust has the effect of causing the wife’s estate to pay tax in excess of £70,000 or £30,000 depending on the order of deaths.
They (and I) consider this unfair and I am wondering whether it is possible to insert a clause in the Wills which has the effect of redressing the balance?
Any guidance or ideas would be greatly appreciated.
I have faced this question a few times and it usually needs a bespoke solution.
The starting point is to have a discretionary trust coming into effect on the second death, allowing trustees (and of course “honest broker” trustees are essential here) to redress any inequality, according to the actual outcome.
Alongside that, of course, you have to watch that a discretionary trust is not wasting any RNRB on a share of property on an interest in possession trust during the survivor’s life – that share must go to children or stepchildren outright or it doesn’t qualify
for RNRB.
A life interest trust will inevitably cause an imbalance in the outcomes by using a portion of the survivor’s NRB. It might be possible to address this by giving the life tenant a remainder interest limited to tax cost (or perhaps the survivor could simply be given a fixed cash legacy on the first death as a rough-and-ready solution) but usually a discretionary trust on the second death would be a simpler and more flexible approach. So long as the trust is appointed out within 2 years to children/step-children a full double RNRB should be available on the second-death.
Are there any transferable NRBs available from the previous marriages (if either or the previous marriages ended on death rather than divorce)?
If a discretionary trust is to be used to help balance distributions on the second death, care needs to be taken in the drafting thereof.
Whilst it is usual to include a provision that the value of a nil rate gift is such as to ensure no IHT is payable, on the second death (where there is no surviving spouse), if the value of the estate exceeds the available nil rate band, IHT will be payable on residue and the NRB gift disappears. Accordingly, it will be necessary to adapt the definition of the NRB Sum to ensure that it will still be payable even if the stare is subject to IHT.