Some people have concluded that discretionary will trusts no longer have a place in capital tax planning following the introduction last October of the transferable nil rate band (NRB) provisions. Since last October any NRB allowance which is not used on the first death can be transferred to the surviving spouse's estate on their subsequent death.

HM Revenue & Customs (HMRC) are steadily reducing Inheritance Tax (IHT) planning opportunities making it essential for clients to maximise those reliefs and exemptions which are still available.

For business clients two of the most important IHT reliefs are Agricultural Property Relief (APR) and Business Property Relief (BPR). Provided land satisfies the definition of "agricultural property" and has been occupied for the purposes of agriculture for either two or seven years (depending upon who farms the land), the IHT relief which is then applicable is 100% of the agricultural value of the property.
So far as BPR is concerned, 100% relief is available for:

  1. the assets in the business of a sole proprietor or the interest of a partner in the assets of a partnership.
  2. the unquoted shares or securities of a trading company controlled by the transferor immediately before the transfer
  3. the unquoted shares in a company which do not fall within (2) above and which (either by themselves or together with other shares or securities) are related property immediately before the transfer gave more than 25% of the votes exercisable on all questions affecting the company as a whole.

50% relief is available for:

  1. a minority holding of unquoted shares in a trading company
  2. quoted shares in securities of a trading company controlled by any transferor immediately before the transfer
  3. any land or building, machinery or plant which, immediately before the transfer was used wholly or mainly for the purpose of a business carried on by a company of which the transferor then had control, or by a partnership of which he was then a partner
  4. any land or building, machinery or plant which, immediately before the transfer, was used wholly or mainly by a trading company for the purpose of a business carried on by the transferor and was settled property in which he was then beneficially entitled to an interest in possession.

In the event that you own an asset which will either qualify for APR or BPR then the discretionary will trust is still a valuable tax planning tool. If you have a business or farm which qualifies for BPR/APR then you may want to leave that asset to the next generation. However, there can be a problem where some of your children work in the business and others do not or if there is inadequate provision outside of the business for the surviving spouse.

One solution would be for the testator to leave in his/her Will assets which qualify for BPR/APR to a discretionary trust. HMRC will then have to consider on the death of the testator whether relief is available and if so at what rate. If HMRC successfully argues that BPR/APR is not applicable then the assets can be appointed out to the surviving spouse within two years of death so that the spouse exemption applies and no Inheritance Tax is payable.

If, on the other hand, the asset does qualify for BPR or APR and goes into the discretionary trust, that business interest can subsequently be sold and the cash proceeds of sale would be ring-fenced outside the estate of the surviving spouse for IHT purposes on the second death. There is the additional advantage that the surviving spouse can be a beneficiary of the discretionary trust so that he/she (if the trustees agree) can still have access to the capital and income from the sale proceeds.

Discretionary will trusts are also a useful vehicle for individuals concerned about assets being eaten away on care fees incurred by the surviving spouse.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.