Unwinding Unwanted Nil Rate Band Trusts
Nil Rate Discretionary Band Trusts
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What is a nil rate band trust?
Many existing Wills contain a nil rate discretionary band trust which became unnecessary for its main intended purpose with the introduction in October 2007 of the transferable nil rate band between the estates of spouses. Where both spouses are still alive a new Will can be made to revoke the nil rate band trust will but if this is not done for whatever reason, the nil rate band trust can still be unwound after the death of the first spouse.
Winding up a nil rate band trust
The easiest way to do this and unwind the trust is for the trustees to appoint the trust assets in favour of the surviving spouse absolutely. This must be done within two years of death but not within the first three months following the death of the first spouse. Provided these time limits are complied with the appointment will be treated for IHT purposes as if the assets had simply been left to the surviving spouse outright, so the surviving spouse will have the benefit of the transferrable nil rate band. See Section 144 IHTA 1984. If the appointment is made within 3 months of the date of death it may be treated as a chargeable IHT event and there will be no reading back into the will.
Provided that the appointment is made during the period of administration of the estate, which it normally would be, it will not give rise to a capital gains tax liability as the spouse will acquire as legatee.
The appointment out during the administration of the estate may be the preferred option but there are of course other uses for nil rate band discretionary trust wills, in addition to the preservation of the nil rate band of the first spouse, so this should not be done without full consideration of any other benefits preserving it might achieve.
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Jan Atkinson
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