Estate Planning to maximise Inheritance Tax (IHT) allowances

Let’s say a client has a will in place (which is more than 70% of the population!) and it directs their estate to trust. What if their circumstances change? What if they get married or have kids; what if the estate value grows or the law changes? Any of these situations could arise. It’s therefore important to provide flexibility to executors and trustees, and to appoint a professional.

Leaving assets to trust on death

Where an individual (known as the settlor) passes their estate on death to a trust or trusts, a trustees’ meeting is required where the trustees discuss the assets they are due to receive following the settlor’s death.

The trustees’ meeting is usually held once the estate administration has been finalised. In some instances, however, it may be preferable to have a trustees’ meeting prior to probate being applied for.

For example, the trust or trusts co-ordinated with the will are likely to be either discretionary or interest in possession (IIP) trusts. Discretionary trusts allow the trustees, by law, to amend the trust (s.144 IHTA 1984), providing any amendments are made within two years from the date of death. In this case, amending a discretionary trust before probate is applied for could yield positive Inheritance Tax (IHT) advantages.

The Residence Nil Rate Band (RNRB) and discretionary trusts

The Residence Nil Rate Band (RNRB) is an additional IHT allowance to the Nil Rate Band (NRB). The current RNRB available is £175,000. Unlike the NRB, there are certain criteria that must be met by the deceased’s estate in order to qualify for the allowance. The criteria are outlined in the Inheritance Tax Act 1984. Generally speaking, it stipulates there must be included in the estate a residence, or an interest in a residence, which direct descendants are deemed to inherit (absolutely/immediate post-death interest) following the death.

Since a discretionary trust is clearly not a direct descendant of the deceased, it may seem impossible to benefit from the protection of a discretionary trust and the RNRB; the truth is you can benefit from both. But there is a risk your trustees may not know this – or realise it too late.

At CTT, if we are appointed as executors and trustees, we encourage a trustees’ meeting to be held prior to probate being applied for. This way, the discretionary trust terms can be amended to bring about an RNRB claim by the executors in plenty of time before the two-year deadline; the executors can complete the probate application, which will accurately reflect the position of the deceased’s planning; and the estate administration is handled in an efficient manner.

For clients whose existing planning passes their estate on death to our enhanced discretionary trust, this ‘unique to the industry’ trust ensures that the RNRB is not lost if the appropriate actions aren’t taken by the executors and trustees. However, we would still encourage a trustees’ meeting to be held prior to probate being applied for to ensure maximum control and flexibility remain with the executors and trustees to make decisions in the best interests of the estate and the intended beneficiaries.

S.144 IHTA 1984 and IHT

S.144 IHTA 1984 may also provide for other IHT advantages in addition to providing for an RNRB claim. We have also made use of s.144 IHTA to effect appointments to charities resulting in charity exemption being claimed and, in some instances, the reduced rate of IHT being applied to the estate. In more common instances, s.144 IHTA 1984 is often used to facilitate a claim for spouse exemption, resulting in complete IHT exemption.

Case study: Michael’s estate
Michael passed away a married man with children and grandchildren that survived him. His will directed his entire estate to a discretionary trust. On his passing, his estate was valued at £500,000, clearly in excess of the NRB and as such IHT was payable.

A trustees’ meeting was held prior to probate being applied for, where the trustees considered what actions could be taken to mitigate the estate’s IHT liability. An appointment to the spouse was considered, however, the spouse who was quite a lot younger than the deceased, already had a sizeable estate of her own, and her interest in a property would already mean she would qualify for the full RNRB.

It was therefore concluded that the best advice would be to establish two IIP trusts with the grandchildren being the IIP beneficiaries, and to make an s.144 appointment, appointing a share of the property equivalent to the RNRB of £175,000 to the IIP trusts. These actions not only facilitated an immediate RNRB claim but also provided an opportunity for advanced estate planning to be effected, which may prove more beneficial in the long term.

Benefits of using trusts to maximise IHT allowances and RNRB eligibility
• IHT saving of £70,000+
• Maximise IHT allowances for a married couple
• Low-risk approach – no risk of losing it either to changes of legislation or taper
• Efficient probate – apply for probate accurately, reflecting the planning position
• Flexibility – planning that can be adapted to fit the circumstances when all the facts are known, resulting in the best possible outcome for the beneficiaries

If you’d like to learn more about how estate planning could help you maximise IHT allowances and the RNRB eligibility of your estate, contact us at CTT Professional Services.

This article was submitted to be published by CTT Group as part of their advertising agreement with Today’s Wills and Probate. The views expressed in this article are those of the submitter and not those of Today’s Wills and Probate.