Facebook Twitter LinkedIn

'Nil-rate band' Discretionary Loan Trust Wills - should we now change them?

Over the years, we have made many Wills for married couples which included Inheritance Tax (IHT) nil-rate band Discretionary Loan Trusts. These have been a 'tried and tested' way of achieving dramatic savings in Inheritance Tax. Up to 8th October 2007 you could save up to £120,000 in Inheritance Tax by making your Will in this way.

This has changed as a result of the Chancellor's Pre-Budget statement on 9th October 2007.

Discretionary Loan Trust Wills still have a use where a person would prefer to leave their IHT allowance to someone other than their spouse or civil partner.

Wills that contain a Disctretionary Loan Trust will still be effective for many. The use of  this Trust, rather than passing the whole estate on death to the survivor, will be particularly important to couples who are in second or third marriages and wish to ensure that their respective estates pass as they wish to benefit their own children or family.

If the first spouse to die leaves everything they own to the survivor, when the survivor subsequently dies, they will now get the benefit of the IHT nil-rate band which belonged to the first to die without having had to have made Discretionary Loan Trust Wills. In fact, you will now potentially be better off as a result of the new law, since the unused IHT nil-rate band of the first to die will be passed to the survivor at the amount applicable to the date of death of the survivor, which may be higher than that applicable on the first death.

By way of example, the current limit of the IHT nil-rate band is £325,000.

When we made IHT nil-rate band Discretionary Loan  Trust Wills we always included a power to allow the trustees to pay over or "appoint" the entire trust fund to the surviving spouse. If the trustees use this power within two years of the date of death of the first spouse to die then for Inheritance Tax purposes you will be back in the position you would have been in had you just left everything outright to the survivor in your Will, so you will be able to take maximum advantage of the new law.

So there is no need to change your Will, unless you would like to take the opportunity to simplify it, or if there are other changes which you wish to make.

If you made Discretionary Loan Trust Wills and the first spouse has already died, as long as the date of death was less than two years ago the trustees should consider using the power of appointment referred to above to take full advantage of the new law.

If you made Discretionary Loan Trust Wills and the first spouse died more than two years ago the tax saving will now be less than you would have saved if you had done nothing at all. If you may have lost out as a result of this very abrupt and unexpected change in the law you may wish to consider writing to your MP to complain!

Should you wish to discuss this further, please do not hesitate to contact us.