I have come across a complicated will drafted by an estate planning company that purports to leave a Residence Nil Rate Amount (i.e. total amount or allowance in respect of increased nil rate band for IHT to which my estate may be entitled at the date of my death under the IHT Act 84, s/8D to 8M) on trust subject to overriding powers and in default of such appointment and at the end of 18 months from the date of death on trust for lineal descendant(s).
Is this sufficient for it to be deemed that there is an IPDI for a lineal descendant? Does the 18 month period disapply the IPDI provisions or will this be saved by reading back?
However, I believe the question raises a different point.
I have now seen a number of wills which purport to create a legacy equal to the RNRB to which the estate is entitled. If the circumstances are such that RNRB is available, then I accept a will can include a gift of an amount equal to the available RNRB in the same way that it can include a gift equal to the available nil rate band. In effect it merely removes from residue the benefit of the RNRB. Complications arise where the circumstances of the estate are such that there is no RNRB available (e.g. residue passes to spouse, civil partner or charity), but the will still includes such a gift. In those cases, it can be helpful if whoever drafted the will would explain the reasoning behind the gift (I have yet to have any such explanation shared with me!).
As regards the question raised, I am not aware that the IPDI can be ignored for IHT purposes, so that there would be no reading back at the end of the 18 month period. However, as the RNRB will have arisen in respect of some other gift in the will, I do not believe it should affect the estate’s right to RNRB.
(I am aware of s.142(4) IHTA 1984 which provides that if a variation creates an interest in possession that ceases within 2 years of death, the situation that arises on the termination is “read back” to the date of death for IHT purposes and that, at times, the implications of this are erroneously assumed to apply to an interest in possession generally)
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
Thank you both for your comments. I have been assured that the clause does “capture the relevant beneficial share of the deceased’s property - i.e. equal to the RNRB”. Is it possible that the definition above can include a beneficial share of property rather than be interpreted as a pecuniary legacy"?
There is no bare trust for lineal descendants. I have been informed by the Estate Planning Company (who prepared the will and are trustees alongside family members) that the Trustees need to complete an appointment of residential interest to lineal descendants. I am still unsure about whether the RNRB has been captured by the will as the gift is defined as “total amount or allowance in respect of increased nil rate band for IHT to which my estate may be entitled at the date of my death under the IHT Act 84” and the residue of the estate is held on an IIP trust for spouse. I have been assured that the Estate Planning Company that their precedents are tried and tested and have had approval from a KC.
The will trust being discussed here is one I believe to be produced by Countrywide Tax and Trust Corporation Ltd from the facts as they appear here, and on that basis, I thought I would add this for our members:
The will itself is not complicated, the complications stem from the legislation as we are all too painfully aware. The will merely gifts “the combined NRB” (as defined) upon discretionary trusts.
The RNRB element of the combined NRB is held upon a DT that defaults to an IPDI within 18 months of the testator’s death as discussed, so on that basis I agree with Paul Saunders’ assertion.
The clause in the will does capture the RNRB provided that there is a QRI (including any downsizing proceeds, either in addition to or exclusively) and pass it accordingly.
Within the 24 month period, s144 is available, so an IPDI is triggered (or can be prevented within the 18 month period) in favour of the youngest class of lineal descendants (if any), thus allowing the RNRB (and TRNRB) such that apply to be claimed.
The trusts were proposed and drafted under the supervision of a very well respected chambers (likely the most respected within this area of law) and have been submitted to HMRC whenever requested (in pilot trust form) during the estate administration.
I am somewhat surprised regarding the comments from both Gill and Paul relating to having not received explanations as for how the trust may operate if there is no RNRB available, hopefully this is clarified above, however we would be happy to discuss outside of the forum, to date I am not aware we have received such a request for explanation, other than from our client’s families or their legal representatives requiring advice with regard to the RNRB claim.
The point that I believe @spencert is making is that the Will does the following:
Defines the RNRB amount of the “qualifying residential interest” (QRI - a residence or its proceeds of sale, etc.)
Gives that RNRB amount of the QRI to a discretionary trust.
That in itself is insufficient for the RNRB to be available, as it isn’t available on legacies to discretionary trusts. But…
The terms of the trust automatically establish an interest in possession in respect of that RNRB amount after 18 months from the date of death; the life tenants of that IIP will be lineal descendants of the testator.
Once that is triggered, it will satisfy the terms of s144 IHTA 1984, so that the IIP in respect of that RNRB amount will qualify as an IPDI; it will mean that the gift of the RNRB amount (now held on IPDI terms) restrospectively qualifies for the RNRB allowance. If it did not switch to an IIP but remained a discretionary trust, then the RNRB alllowance would not be available.
I assume that the discretionary nature of the trust in the first 18 months gives the trustees the opportunity to alter the trust in some way instead of the default position taking effect: for example so that they can choose which lineal descendants are to become the life tenants, or indeed whether to appoint the whole trust fund to the surviving spouse, so that their estate can benefit from the TRNRB. Lots of possibilities, but the way the trust is drafted will mean that if nothing is done then the default is that the lineal descendants specified in the Will (probably the children of the testator, but with substitution provisions per stirpes for remoter issue) will become the life tenants after 18 months, which will mean that, at that point, the RNRB allowance will retrospectively become available.
The RNRB amount could be appointed out absolutely to the lineal descendants if preferred.
A legacy of the testator’s NRB could also be combined into the legacy, but it doesn’t have to be. If it is, then it doesn’t have to become an IIP within two years, unless that is desired, as the availablility of the NRB does not have the “lineal descendant” requirements.
However, one also needs to consider the complexity of it all: is it really necessary, especially given the size of the RNRB? For the most part, we no longer generally include NRB discretionary trusts in Wills for when the first spouse dies, because of the availability of the TNRB and the comlpexity of using a discretionary trust, but arguably one could include it and there will be some circumstances when I can see that one might/should. If there is a married couple where one or both are already widowed, then that might be a good reason to use up a NRB/RNRB (and possibly a TNRB / TRNRB) on first death. One always needs to look carefully at the circumstances of those making the Wills and consider what is appropriate for them. Just because the trustees can get rid of a discretionary trust if they consider it unnecessary, does not mean that the trust should be included in the first place: if there is no realistic likelihood that the trust will be needed / wanted, then perhaps it is better not to include it in the first place.
Just to add to what Paul has said - presumably it involves an extra step (an appointment to the issue) if you want to apply for probate within 18 months of death, otherwise you may have to pay the IHT to obtain the grant.
I would have thought a will that just allowed the property to pass to the issue as part of residue would be simpler in 80% of estates - otherwise we could make all wills entirely discretionary with a view to making appointments following the death.
So is it the case that, on death, the executors/trustees have three choices:
Appoint absolutely - i.e. keep the RNRB amount outside the trust and gift it directly to a lineal descendant
Give the RNRB amount to the DT and then create an interest in possession for that amount in favour of a lineal descendant (they can either do this proactively or allow it to happen by default after 18 months)
Decide not to use the DT at all and allow the RNRB amount to pass to the surviving spouse, so as the full RNRB + TRNRB is available on 2nd death
Have I got that right?
If so, am I correct in thinking that (1) and (3) would require a deed of variation to be drawn up to alter the will post-death?
Regarding the extra complexity of this whole setup, I take your point, but presumably there are other benefits to using these trusts (aside from IHT reduction) - e.g.
it protects assets in the event that the 2nd spouse requires long term care
if one of the grown up children receives means-tested benefits then it prevents the inheritance from affecting their benefit entitlement
Also, if you allow the RNRB to transfer to the spouse then surely there’s the danger of losing some or all of it if the 2nd spouse’s estate ends up being >£2m or if legislation changes in the future?
But I guess if the executors really feel at the time of death that the complexity of the trusts wipes out any potential benefits they offer then they can always (via a deed of variation) choose not to use the trusts as suggested by @andrew.goodman ?
Would be interesting to hear @spencert’s thoughts on all this too.
That bit of incorrect terminology aside, do you know if I was correct in terms of those being the three options that the executors/trustees have? And was I right about which ones would/wouldn’t require a deed?