Do inheritance tax changes mean I should change my will?

14 March 2017

Karen Clark

It is always prudent to review your will on a regular basis, particularly when certain life events occur, such as marriage, divorce, the birth of a child or grandchild, the death of a beneficiary or executor. But some changes in tax law can also affect the provisions of your will. You need to keep an eye on these.

The introduction of the transferable nil rate band (NRB) between spouses in October 2007 was one such example, where an individual's will no longer needed to specify that an ‘amount equal to the NRB in force at the date of my death’ should pass to beneficiaries other than the surviving spouse to ensure the NRB was not wasted on the first death.

On 6 April 2017 the first tranche of the residential nil rate band (RNRB) of £100,000 will be introduced, with further increases of £25,000 per annum from 6 April 2018 leading to a maximum of £175,000 by 6 April 2020. Any unused portion on the first death can be transferred to the surviving spouse, in the same way as any unused portion of the ‘normal’ NRB.

However, the conditions to qualify for the RNRB are such that careful will drafting is required to ensure the individual (and their spouse) will qualify for it.

For example, the relief is withdrawn by £1 for every £2 the value of a deceased's estate exceeds £2m (before reliefs such as business property relief or agricultural property relief), so for one individual who dies on or after 6 April 2020 it is lost after the estate is worth £2.35m (£2.7m for a surviving spouse).

If both spouses have estates worth say £1.5m, the first spouse to die might want to ensure that sufficient assets pass to beneficiaries other than the surviving spouse so that, on the second death, the RNRB is not restricted or lost completely. This might happen because the second spouse has inherited assets on the first death and has an estate worth say £3m on their death, thus losing the entitlement to the RNRB.

In addition, the RNRB is only available for residential property which passes to children or other lineal descendants (and/or their spouses) outright or onto a favoured trust for their benefit (eg an immediate post death interest (IPDI) trust, bereaved minor's trust, 18-25 trust or disabled person's trust).

The RNRB will not be available on transfer of the property to ‘relevant property trusts’ such as a discretionary trust, even if the only beneficiaries are the testator's children/grandchildren. A typical grandparental settlement ‘to such of my grandchildren as reach 21’ will not qualify for RNRB if the grandchildren are minors at the date of the testator's death because that is a relevant property trust. To secure the RNRB the grandparents would need to opt for a bare trust or an IPDI trust. 18-25 trusts and bereaved minors trusts can only be created by parents.

Any existing wills which pass the deceased's home to a discretionary trust on death will need to be reviewed. That said, it is still possible to vary a will within two years of death but the beneficiaries and executors will need to agree to this, which may not always be achievable.

For more information please get in touch with Karen Clark, or your usual RSM contact.