Cash Clinic: The benefits of nil rate trusts are subtle but worth considering

Q MY HUSBAND and I are in our fifties, but we have not yet made wills. We were thinking of having a nil rate band trust put into our wills to save tax, but apparently we already have a double nil rate band that can be shared between us, so what would be the advantages of having this type of trust? Are trusts not just for the wealthy?

–MK Hawick

A Nil rate band trusts are used in the wills of married couples (and civil partners) to help protect their assets. This avoids the nil rate band (currently 325,000) being wasted on the first death of a couple, saving up to 130,000 inheritance tax (IHT) on the second death.

Since October 2007, the unused nil rate band of the first to die can be transferred to the survivor, who can have a combined nil rate band of up to 650,000, so the benefit of a nil rate band trusts in wills is less obvious than it was previously. Please bear in mind that any gifts made in the seven years prior to death would be taken into account. There are still various reasons to consider nil rate band trusts, however:

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• Protection from payment of additional IHT where assets are increasing in value and from future legislative changes

• Protection of assets from future residential care costs, from means-testing of benefits and for future generations

• Flexibility in determining who should benefit from the trust and in winding it up, if it is decided that it is not useful or appropriate

Flexibility and protection are the two main reasons for having such a trust in your will. Your executors would have discretion to decide which of your named beneficiaries should benefit from your estate.

The nil rate band is frozen for 2010-11 at 325,000 with future increases uncertain, although it is likely that assets will be subject to more IHT as they increase in value in future years. Having assets pass into a nil rate band trust on the first death constrains any future increases in value outside the survivor's estate, with the prospect of significant IHT savings on the second death. It will also guard against the possibility of the transferable nil rate band facility being withdrawn by future governments, and can provide a way of securing business and/or agricultural property against future restrictions of the generous tax reliefs currently available.

The trust can also provide some measure of protection from care home fees or means-testing of benefits.

If there is a chance your husband might remarry, a discretionary nil rate band trust provides some protection for any children from your marriage against disinheritance. The trust can equally provide some protection against potential future bankruptcy or divorce of the trust's beneficiaries.

So you should not discount the value of nil rate band trusts on the basis of the current tax law, but it is essential to take expert advice.

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Glen Gilson is a partner and head of private client and financial services at HBJ Gateley Wareing.

• If you have a question, write to Jeff Salway, Personal Finance Editor, The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or e-mail: [email protected]. The above is for general purposes only and is not tailored for individual use. It does not constitute legal, financial or investment advice on any particular matter and must not be treated as a substitute for specific advice. No action should be taken in reliance of the information given. The Scotsman Publications Ltd and HBJ Gateley Wareing accept no liability on the basis of this article.