ONLINE UPDATE
Drafting Trusts and Will Trusts, 9th edition
By James Kessler QC and Leon Sartin
Introduction
This is the first online update to Drafting Trusts & Will Trusts 9th edition. It covers developments from 1 August 2008, when our book went to print, up to 1 April 2009.
In particular we discuss:
- the new guidance on transferable NRBs in HMRC’s Inheritance Tax Manual
- the new IHT 400 series of forms,
- additional Will precedents for married testators
- the Court of Appeal decision in HMRC v Clay [2009] STC 469.
- minor corrections or clarifications to paras 18.2, 20.3 and 25.2
- the Perpetuities & Accumulations Bill
The disclaimer in our book also applies to this online update.
Chapter 9 Perpetuities
9.9 Future of the rule against perpetuities
In this para we said “it is hoped that the Perpetuities & Accumulations Act will be implemented by the time of the next edition of this book.” The Perpetuities and Accumulations Bill was introduced into the House of Lords on 1 April 2009, though it is not likely to come into effect before April 2010.
Chapter 18 Will Drafting After the Finance Act 2008
18.6 (NRB claim)
HMRC have introduced a new IHT400 account and accompanying schedules numbered IHT401 to IHT423, which replace the IHT200 and the ‘D’ supplementary pages. These are available to download at www.hmrc.gov.uk/cto/iht/news-iht400.htm.
Personal representatives should use the new IHT402 schedule to form IHT400 to make the claim for the benefit of the transferrable NRB.
If the PRs do not make the claim, any other person liable to the tax chargeable on the survivor’s death can make a claim using the old form IHT216: see Inheritance Tax Manual IHTM43006. Unfortunately, this form has at the time of writing been removed from HMRC’s website (presumably on the mistaken basis that it no longer serves a purpose).
18.12 (Married testator: provision for children by will)
Most married couples will now opt for the simple route of leaving their entire residuary estate to the survivor, either absolutely or conferring an IPDI on the spouse: see 18.11 (Best form of will for testator who is married or a civil partner). We prefer the IPDI route in principle (will form 2 in the book) but for many testators, especially with smaller estates the absolute gift will be preferred. The question then arises as to what provision the will should make if the spouse does not survive the testator. In principle, there are 4 different types of provision which could be made for the children if the spouse does not survive to take the estate absolutely:
(1) Absolute gift of the entire estate to the children (we need not provide a precedent for this, which does not involve any will trust).
(2) An age 18-25 trust (for the children contingently on reaching a specified age up to 25).
(3) Residue to pass to will trust under which the children have IPDIs (Supplemental Will 1); or
(4) Discretionary will trust of entire residuary estate (Supplemental Will 2).
The choice will not affect the IHT on the death of the testator since the IHT spouse exemption is by definition unavailable in the situation envisaged (that the spouse does not survive the testator).
Solution 1 (absolute gift) is the simple course. However it might be inappropriate for the children to receive an absolute interest (e.g. they are too young or their financial or matrimonial position is unsettled). Solution 2 incurs the 4.2% age 18-to-25 trust exit charge, and so is not recommended.
Solution 3 (IPDI trust) is a better solution. The children cannot consume the capital or prevent it from passing as the testator wants on their death. The IHT and CGT advantages & disadvantages are discussed in 17.4 (Why use IPDI trusts)?
We regard solution 4 (discretionary trust) as by far the best solution in principle. It gives the trustees flexibility to decide within 2 years of the death how best to proceed: s.144 IHTA 1984. The correct choice will depend on life expectancies and values and circumstances generally including the state of the law at the time. For smaller estates (especially those under the single NRB), the ongoing standard IHT 10 year and exit charges are not harsh and CGT hold-over relief is, unlike for IPDI trusts, in principle available on the termination of the trust.
For those who wish the estate to pass to the spouse absolutely, we have therefore produced two additional precedents:
Supplemental Will 1 (residue to spouse absolutely, IPDI to children if spouse does not survive)
Supplemental Will 2 (residue to spouse absolutely, discretionary trust for issue if spouse does not survive).
18.14 (Construction of traditional nil rate band formula where transferable NRB applies)
If a testator leaves a will in the
form of earlier editions of this book, giving a NRB legacy to a NRB
discretionary trust, and the testator had a predeceasing spouse with
an unused NRB, what is the amount of the NRB legacy? Is it the
single NRB or the double NRB? In our book we took the view that our
wording conferred a double NRB. Although some have questioned this
view, HMRC have now announced that they agree. The updated
Inheritance Tax Manual addresses this question.
HMRC take the view that the common form wording confers a double NRB legacy (see IHTM43065):
[1] “I
give free of tax to my trustees such sum as at my death equals
Of course, it depends on the wording
and one could achieve either result by
[2] “To my trustees such sum as
I could leave immediately before my death
[3] “I give free of tax to my
trustees an amount equal to the upper
[4] “To my trustees an amount
equal to the nil rate band in force at my
Para 18.2
We noted in 18.2 (Will
drafting - Introduction) that for the purposes of the transferrable
NRB, it does not matter when the first spouse died. Even if the
first death took place before 9 October 2007, a claim for the
transferrable NRB is available - provided the survivor died on or
after that date. Indeed, it is possible to claim the transferrable
NRB even in cases where the first spouse’s estate was subject
to capital transfer tax or estate duty. Note however that until 21
March 1972, there was no spouse or charity exemption from estate duty
and, from 22 March 1972 to 12 November 1974, these
exemptions were limited
to £15,000 and £50,000 respectively. So
even where
the first spouse left everything to the survivor or
to charity,
the NRB may still have been fully
used, leaving nothing
to transfer, and in this sense the date of death of the first spouse
continues to be relevant.
Chapter 20 Wills and Care Fee
Planning
20.3 (Types of trust)
This paragraph refers to the 3 types
of wills for care fee planning. After the FA 2008, option 1 and 2
(IPDI in house or IPDI in whole estate) are recommended as the
preferred options and option 3 (NRBT) as generally unnecessary - for
the reasons set out in chapter 18 (Will drafting after the Finance
Act 2008.)
Chapter
21 Administrative Provisions
21.28 (Power to pay capital
expenses out of income)
HMRC v Clay
[2009] STC 469
We noted that the
position whether an expense was capital would be clearer when HMRC
v Clay was final. The
Court of Appeal have now decided that an expense is incurred “for
the benefit of the whole estate” if the purpose or object for
which that expense was incurred was to confer benefit both on the
income beneficiaries and on those entitled to capital on the
determination of the income trusts. An expense can only be charged
against income if it is incurred exclusively
for the benefit of the income beneficiaries.
Chapter 25 Trusts of damages
25.2 (Trust of damages for adult
with mental capacity)
For damages in excess of the NRB, the
IP trust is no longer an attractive option (post-FA 2006) for IHT
purposes since it will give rise to an immediate charge to tax. The
text should therefore read:
“For property in excess of the
nil rate band, a bare trust would be preferable (if appropriate,
investing the fund in non-income producing assets). An IHT disabled
persons trust (where possible) may be better: see 26.8 (IHT deemed IP
trust for disabled beneficiary).”
James Kessler QC
Leon Sartin
1 April 2009 Here
is information on how to buy
Drafting Trusts and Will Trusts and other books by James Kessler.
the
maximum amount which could be given to them by this Will
without
inheritance tax becoming payable in respect of my estate”
will allow the
uprated nil rate band to be transferred.
appropriate drafting. The
IHTM gives some subtle variants:
without IHT becoming
payable” will only transfer the single nil rate band
available
on the deceased's death, because any nil rate band that
may
transferred is not available immediately before death.
limit of the nil per cent
rate band in the table of rates in Schedule 1”
will only
transfer a single nil rate band.
death” again will
only transfer a single nil rate band.