Increasingly clients are asking for maximum asset protection in their Wills, mainly to protect against their children’s divorces. So Wills that leave a life interest to spouse on first death, thereafter to a Discretionary Trust. On second death to a DT. I appreciate that stopping at this will mean no QRI on either of the spouses estate. So I have come up with the following Will template. Would what I’m proposing work please?
On first death-
Life interest to surviving spouse in “Property Fund” i.e. the half share of the home or the net proceeds of sale. Remainderman interest split between life interest for first spouse’s children in a part share equivalent to the RNRB value on first death and remaining part share of Property Fund on discretionary trusts.
Residue on life interest trust for spouse for life, then following spouse’s death to discretionary trust.
On second death - Life interest for second spouse’s children in a part share equivalent to the RNRB value on second death and remaining residue on discretionary trusts.
I would include a clause authorising the Trustees to terminate the life interest trusts for children and a letter of wishes would encourage Trustees to do this straight after HMRC has accepted the RNRB and TRNRB claims so that the whole of the combined estate can now be held on discretionary trusts as per my clients’ wishes. They’re guaranteed maximum flexibility whilst preserving full RNRB and TRNRB allowances haven’t they?
Hi, not really scrutinised this but what’s jumping out is that the life interest for the direct descendants that follows the spouse’s life interest won’t qualify for RNRB. If the qualifying interest stems from a trust interest, then in order for RNRB to bite on where the property then goes, it cannot enter another trust for the direct descendants. It must be inherited immediately. s8J(5) IHTA 84.
Where the surviving spouse is given a life interest in the deceased’s share of the property there are only 3 ways that RNRB can be claimed on the second death:
1 remainders to the children are absolute (with or without substitutionary absolute remainders for issue)
2 remainder on DT with appointments to children as in 1 or appointment out to survivor, in either case during the survivor’s lifetime
3 the survivor has a general power exercisable only by Will which during lifetime is exercised to create remainders as in 1 or IPDIs for children/issue
In 2 there will be an RPT exit charge on an appointment to the survivor. In 2 and 3 there is the risk of no Will or no exercise of the power by the survivor. In 3 IPDIs can later be terminated as PETs or CLTs or appointment to the holder IHT-free.
Obtaining RNRB should not overlook CGT after the survivor’s death if there is a long period of retention of the house without accrual of PPRR.
Thank you Jack. I wrote this post prior to receiving your advice on another post. So I believe the answer is:-
On first death -
IPDI for children of first spouse to die in a property share of a value equivalent to RNRB at first death with Trustees’ power to terminate that life interest which they will be advised (in a letter of wishes ) to do soon after first death. Jack you explained to me that there are two options- 1. To terminate in favour of surviving spouse so property share becomes subject to remaining IPDI for spouse. 2. To bypass spouse to the final DT but ensure that surviving spouse is one of discretionary beneficiaries- main advantage being the value doesn’t aggregate with surviving spouse’s estate. Disadvantage of second option is that DT is created on first death thus affecting timing and impact of ten yearly charges.
I’m assuming that it is fine to leave it to the Trustees to decide on which option to take after first death. My letter of wishes will include advantages and disadvantages of both. In the Will itself I will just give Trustees power to “vary or terminate” but it will be up to them to decide how to do that.
I presume this is all ok so far?
Reside of first spouse’s estate (including remaining property share over the RNRB) - IPDI to spouse and thereafter to DT.
Survivor’s estate to a DT. Trustees can appoint survivor’s QRI out to children absolutely or better to IPDI for children - they do that before completing IHT 400 and once RNRB is successfully claimed they can very quickly terminate the IPDI so the former QRI is once again held on discretionary trusts.
Any comments or feedback on this proposed action would be much appreciated.
I assume there is an unstated strategy behind the determination to capture RNRB on the first death rather than utilise spouse exemption and then use RNRB and TRNRB on the survivor’s death. Possibilities are that TRNRB can be claimed by the survivor from a previous spouse, or to avoid RNRB taper, or simply to avoid tax on the second death.
The IPDI for children on the first death sheltered by RNRB is self-defeating if their interests are terminated, even without an actual charge to IHT, but so that the asset finds its way into the survivor’s estate. Terminating their interests into a DT prevents that happening. It also secures CGT PPRR while the survivor occupies as a beneficiary of the DT. If the house is sold the survivor can even have access to the funds if necessary. Hold-over relief will be available to avoid CGT on any future distribution of chargeable assets into which sale proceeds are invested.
The value of the asset and, often significantly, its subsequent increase in value, will not be taxed on the second death. The destination of the trust funds can be managed more flexibly by trustees than by the survivor’s Will and without the risk of supervening incapacity to make desired changes to it.
The trade-off is RPT charges. If the first to die has a nil cumulation and as only £175k is initially settled there will be a nil rate of tax on any distribution/termination in the first 10 years of the trust’s existence (inclusive of the IPDI period). As a full NRB will then be available to the trustees on the first TYA there will be headroom for increased value of £150k by that date and in fact more because there will be a valuation discount of 10% or 15% if the survivor is still in occupation as co-owner of the other share (plus a similar discount on that!).
If there is a nil rate on the first TYA that will apply to any distribution in the following 10 years. This provides the attraction of a future tax-free window for distribution/ termination of close to 20 years but dependent on the cumulation before death of the first to die. Even a modest cumulation should still be viable. If the survivor dies within that 20 years the tax saving is 40% on the undiscounted value of the trust fund at the date of the second death. A DT is not completely immune to future changes in the tax system but its inherent flexibility promises considerable adaptability if reasonable notice is given of such changes.
Thank you Jack, I’m clear on all that apart from the first para.
I don’t want to use the RNRB on first death I just want to secure it so that if value of Surivor’s half share is less than £350K TRNRB won’t be wasted. First estate is passing to DT of course following survivor’s death.
I’m getting very confused about this all now. I’m looking at a way of ensuring my clients get the £1million pound nil rate band allowance whilst passing their estate to a DT.
How best now to go about these wills.
My understanding is that -
To secure QRI on first death, need IPDI to children of a property share equivalent to RNRB on first death. This is to secure QRI and therefore TRNRB on second death. Although the QRI is secured it is not used as it isn’t required or claimed. Power of Trustees to vary and terminate and I’d like to leave it open whether they decide whether to fold IPDI to wife’s IPDI OR fold IPDI to Discretionary Trust. This I understand can be the same DT that will be used to receive estate on second death. Whatever they do they should act quickly to avoid adverse tax implications.
On second death Trustees should appoint property to children on IPDI trusts to secure both the RNRB and TRNRB but then again terminate it once estate has been finalised so it falls back into the Discretionary Trust.
Am I on the right course here? Really need to work out how best to proceed here.
I do not fully understand the point you make at 1. If the Will of the first to die leaves an interest in the house on an IPDI for the children worth £175k it will use up the RNRB of the first to die. This is given automatically and crucially in preference to the NRB. There will therefore be maximum TNRB but no TRNRB at all because fully utilised on the first death. So it fulfils many of the purposes of an initial DT but without using any NRB, although limited to £175k in value, and albeit by utilising some part of the NRB of each child when they make a CLT on termination of their IPDI.
As you say the survivor will have prospectively a full NRB and a full TNRB plus one RNRB or downsizing allowance of up to £175k depending on the value of the QRI or FQRI, as the case may be, and on there being no taper. If the second estate is left on an initial DT the trustees will have to trigger s.144 by appointing absolute interests or IPDIs to the children to ensure that the requisite part of the estate is “closely inherited” by reading back.
To minimise CGT, as there is no reading back, if absolute interests are appointed it will likely make sense for the trustees to make that deemed disposal early in the maximum 2 year period after death to minimise any chargeable gain. The trustees’ base cost will be date of death value and there will be no PPRR on any gain unless s.225 applies to a beneficiary.
If the DT is converted by the appointment into an IPDI trust there will be no deemed disposal as the house interest will remain settled property from the second death onwards.
Capturing the first to die’s RNRB banks a saving of IHT @ 40% of £175k and. as I have said, possibly more if the value of the asset and any increase can be kept out of the survivor’s estate, plus CGT PPRR under s.225 and with nil or acceptably small RPT charges.
Of course, it may turn out that the estate of the survivor would have been able to utilise the full TRNRB anyway. It is rather an elaborate solution unless that the probability of that being so is low.
So your final para - Of course, it may turn out that the estate of the survivor would have been able to utilise the full TRNRB anyway. - you mean if the survivor’s half share is over £350K - that would mean none of the TRNRB is wasted?
My only concern as you know is that the value of the surviving spouse’s share in the property is less than the total of the TRNRB and RNRB so some TRNRB is effectively wasted.
I think I need to carve a RNRB Buffer Legacy for the children out of the remainderman interest of a part share of the first spouse’s property interest of such a value that is needed to fully claim the residence nil rate band and the transferable nil rate band on the death of surviving spouse.
Where the survivor’s QRI is over the value of two RNRBs no legacy is given.
One final question (this time not to do with the RNRB). If both husband and wife’s estates are passing into a DT because the wills are drafted as follow -
First death - IPDI to spouse, remainderman interest to DT
Second death - estate to DT
Is it better to create one DT on second death or two ? Or is there an option? Do we decide at the will drafting stage or can it be decided by Trustees on second death.
Advantages of one - administrative simplicity
Advantages of two - two NRBs to calculate anniversary charges and exit charges OR is this not the case as they will be created on the same day with same beneficiaries so will they be seen as related settlements for RPT anniversary and exit IHT charges
Could we still have two if one started earlier- perhaps by the Trustees of IPDI appointing capital out to first spouse’s DT whilst survivor is still alive. Is it worth it? Or better to stick with the one DT.