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Inheritance Tax Allowances: the benefits of claiming allowances on first death

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CTT Professional Services

It has long been considered best practice in standard Inheritance Tax (IHT) planning for a married or civil partnership couple to leave a legacy up to the maximum Nil Rate Band (NRB) to a discretionary trust. The residue is then left to the survivor – either absolutely, or upon an immediate post-death interest trust. This way, no IHT is payable following first death. But are there benefits to claiming allowances on first death?

Some practitioners argue that since the introduction of the Transferrable Nil Rate Band (TNRB) in 2007, there is no longer a need for married or civil partnership couples to include a NRB discretionary trust in their wills; this can often prove short-sighted and the wrong decision for clients and their beneficiaries.

The benefits of NRB discretionary trusts today

There are many benefits of including an NRB discretionary trust in wills. At CTT Group, we champion the use of the NRB discretionary trusts and encourage our network of advisors to recommend them to their clients. Benefits of using NRB discretionary trusts in wills include:

  • The assets entering the NRB discretionary trust will not form part of any intended beneficiaries’ estates and therefore will not be subject to their IHT, divorce, creditor claims, or care home fees. This is particularly important given that the Residential Nil Rate Band (RNRB) tapers if the estate value exceeds £2m.

  • The rate of growth in the value of the trust property is likely to go beyond that of the NRB, given that it is frozen at £325,000 until the 2028/29 fiscal year.

  • The TNRB didn’t exist prior to 2007, therefore it’s not illogical to expect that this could be changed or removed entirely. An NRB discretionary trust will give the estate the ability to claim the NRB (or not) while it is still available.

Claiming the RNRB on first death

With the Residential Nil Rate Band (RNRB) also transferable between married or civil partnership couples, those of us on the Estate Planning team are often asked, ‘What are the advantages to claiming the RNRB allowances on first death?’ The main benefits extend to the following scenarios:

  • If the estate value of the survivor exceeds £2m, then the available allowance will be subject to taper, meaning that the allowance is reduced or lost.

  • The Qualifying Residential Interest of the survivor may be less than the allowance, thus limiting the RNRB claim.

  • The RNRB didn’t exist prior to 2017 therefore it’s not unreasonable to expect that this could be changed or removed entirely. Use it or lose it!

The takeaway

There are many advantages to claiming allowances on the first of a married or civil partnership couple to die. Automatically relying on the ability to transfer allowances may not always be in the best interests of the estate.

You cannot predict the future when you take a client’s instructions. By putting a flexible plan in place that can be adapted to fit the circumstances when all the facts are known (post-death), you’ll be able to guide them in writing a will that results in the best possible outcome for their beneficiaries.

Appointing CTT as professional executors or trustees ensures the above considerations are always taken into account. This way, you can be sure the estates we administer and trusts we manage are handled in the most tax-efficient manner for our mutual clients’ intended beneficiaries.

To access CTT’s professional estate planning services, including enlisting CTT as exors and trustees, call 01926 514 390 or click here for more information.