Deed of variation by a spouse or civil partner
Before the introduction of the transferable nil rate band (NRB) on 9 October 2007, if a husband or wife died but did not use their NRB it would normally have been lost. The failure to use the NRB could have happened by virtue of a joint ownership of property automatically passing under survivorship, or deliberately through the will of the deceased providing for the surviving spouse. Assuming the receiving spouse was UK domiciled, this transfer would have been IHT free. However, it would potentially create a larger second death liability as the combined estate would only benefit from one NRB.
With good legal advice, this could be planned for by both spouses. Their will(s) could have included discretionary NRB trust wording so that, upon the first death, the value of their estate up to the NRB at the point they died would be placed in a discretionary trust. The surviving spouse could be a potential beneficiary. Because the surviving spouse does not inherit directly, no value adds to their estate and no PET or chargeable lifetime transfer (CLT) needs to be made.
Where a discretionary NRB trust was not written into the deceased spouse’s will during their lifetime, a well-advised surviving spouse could, within two years of receiving from their deceased partner, undertake a DoV of what they had received, up to the value of the NRB, in favour of a discretionary trust. For IHT purposes, this variation and subsequent trust would be seen as having been created by the deceased therefore using their NRB, and once again the surviving spouse could be included as a potential beneficiary under the trust without a gift with reservation (GWR).
Although the transferable NRB legislation, effective 2007, initially made this planning look redundant, there can be advantages to creating a discretionary NRB will trust or, alternatively, diverting the DoV into a trust.
A discretionary NRB will trust can provide three significant benefits above a transferable NRB.
- Where the growth in value of the assets in the trust are expected to be greater than the growth in value of the NRB between the first and second death. Given the NRB reached £325,000 in 2009-2010 but is set to be frozen until 2030, any growth in the value of the assets of the NRB discretionary trust is effectively outside of the estate, rather than growing in an estate with a frozen NRB.
- Whereas the discretionary trust route keeps growing wealth outside the surviving spouse’s estate, it also could mean that it preserves the residence NRB. This is because the residence NRB (RNRB) tapers out on the basis of £1 for every £2 for an estate in excess of £2 million, so relying on wealth transferring from the first to die to the surviving partner has a great chance of swelling the second estate rather than wealth transferring into a NRB discretionary trust on the first death.
- Because the transfer to the trust is not made by the surviving spouse, the value in that trust cannot be considered as theirs by the local authority for long-term care purposes or by other creditors.
Where the same planning is instead undertaken by a DoV the first two benefits can apply, but it is possible that the surviving spouse undertaking a DoV to a trust could be considered to have deliberately deprived the estate, particularly if soon thereafter there is a claim for long-term care funding.
A particularly beneficial situation can apply when a surviving spouse remarries. This is because, on their death, the total value that can be carried forward is 100% of one residence nil-rate-band (RNRB) albeit this could be, for example, 30% from one partner and 70% from another, according to how much RNRB was not used on the death of former partners.
However, optimum planning would entail, on the first death, the transferable NRB being relied upon and the new spouse undertaking a discretionary NRB trust so, effectively, two NRBs would be alienated from the estate as well as the NRB of last person to die.
Another planning opportunity arises when a surviving partner, when receiving everything from the deceased, instead transfers some or all of that inheritance into a power of appointment trust by way of a DoV. This would create an ‘immediate post-death interest’ (IPDI), from which the surviving spouse could enjoy income, while the trustees could advance capital to other beneficiaries, affecting a PET from the surviving spouse yet maintaining the transferable NRB from her former partner.
Finally, if the surviving spouse inherited assets through the unlimited exemption from IHT, which also included assets that qualified for business relief (BR), the assets qualifying for BR could be varied directly to other beneficiaries without an IHT consequence.
