Capturing a 3rd and 4th Nil Rate Band

Trusts Discussion
1

Bearing in mind that I am a chartered financial planner and not a lawyer; and I do not advise on wills, can anyone help clarify the position on capturing a 3rd and 4th nil rate band. I have received conflicting explanations .

The husband and wife have both been previously widowed and had received the full value of their former (deceased) spouses with the spousal exemption claimed.

Their wills have been drafted with an IPDI for their interests in their main residence (joint tenancy severed) with a discretionary trust to receive the residue with their children from previous marriages as the potential beneficiairies. We are being told that the PRs can still claim the transerrable nild rate band (TNRB) from each of their former spouses’ estates to help mitigate the IHT on each of their deaths - potentially providing 4 NRBs.

I have another client in similar circumstances where their solicitor has included a separate NRB trust as a ‘legacy’ trust that specifcally names the former deceased spouse. I am told by this solciitor that this is the only way that the PRs can claim the TNRB from the former deceased spouse’s estate.

Would someone be able to provide a clear explanation that clears up this confusion?

Thank you.

2

Where both spouses have each been married before then in principle there are 4 x NRBs available on deaths of both spouses.**

The surviving spouse will invariably be able to utilise 2 x NRB but this may not be the case for the first spouse to die as typically the first spouse to die will leave all or the bulk of their estate to the other surviving spouse and hence they will not have used any of their NRB. This means the surviving spouse has their own NRB, a transfer of their first spouse’s NRB plus a transfer of their second spouse’s NRB giving a total of 3xNRB for the surviving spouse. But for any person there is a cap of 2 x NRB (ie one of the 3 x NRBs is wasted).**

EXAMPLE

FACTS

H1 was married to W1. W1 died.
H2 was married to W2. H2 died.
H1 marries W2.

Assume W2 dies before H1.

USE OF AN IPDI

W2’s DEATH
On W2’s death part of W2’s estate is left on an IPDI for H1 and balance on DT.

PRs of W2’s estate claim a NRB transfer from W2’s former spouse (H2). H2 left everything to W2 and hence H2 did not use his own NRB.

Therefore, on W2’s death possibly a maximum of 2x NRB (650k) available. However, depending upon the figures, 2 x NRB may not be used. EG DT consists of say 25,000. Of the 650k only 25k/650k of the 2 x NRB is used leaving 96% unused.

H1’s DEATH
On H1’s death there is no surviving spouse (as W2 has died earlier).

H1 at his death has his own NRB plus the unused NRB of his first wife W1 (100%) plus the unused NRB of his second wife W2 (96%).

Maximum NRB available to H1 is 2 x NRB (ie H1’s estate cannot use H1’s own NB plus that of his first wife W1 plus unused NRB of W2 ie 2.96).

CONCLUSION

In the above example the number of NRBs which were used was 1.38 plus 2 x NRB ie 2.38.

ALTERNATIVE STRUCTURE: NOT USING AN IPDI

W2’s DEATH
On W2’s death part of W2’s estate is left on DT (not an IPDI).

PRs of W2’s estate claim a NRB transfer from W2’s former spouse (H2). H2 left everything to W2 and hence H2 did not use his own NRB.

Therefore, on W2’s death possibly a maximum of 2x NRB (650k) available. W2’s estate utilises 2 x NRB.

H1’s DEATH
On H1’s death there is no surviving spouse (as W2 has died earlier).

H1 at his death has his own NRB plus the unused NRB of his first wife W1 (100%). H1 has nothing to claim from W2’s estate (W2 having used it all). So, H1’s estate utilises 2 x NRB.

CONCLUSION

4x NRB are utilised.

Malcolm Finney