Ceri Davies, a member of the wills, estates and planning team at solicitors, Charles Lucas & Marshall explains why setting up a trust remains a sound option within inheritance tax planning.

Inheritance Tax (IHT) for trusts changed dramatically last year. The new rules have a significant impact for existing trusts and also for anyone who wants to set up a new trust, either during their lifetime or by Will.

However, most importantly, the rules relating to the taxation of discretionary trusts remain unchanged. Wills containing a “Nil Rate Band Discretionary Trust” continue to be an effective method of reducing IHT for married couples and civil partners.

For the current tax year, the first £285,000 of a deceased’s estate (commonly referred to as the Nil Rate Band) is free from charge to IHT. Gifts between spouses or civil partners are generally completely free of charge to IHT. Traditionally spouses and civil partners have made ‘mirror Wills’ leaving everything to each other on the first death and down to children on the second death.

Where Wills are in this format there is no IHT on the first death but potentially a substantial amount on the second death, as the Nil Rate Band of the first to die will have effectively been wasted.

One option would be for a gift equal to the Nil Rate Band, to be given direct to the children on the first death. However, few couples can afford to do so as the surviving partner will need access to those assets.

As an alternative, Wills can be drafted so that a legacy equal to the Nil Rate Band is given to a discretionary trust. No decision is made at the time of drafting the Wills as to who will benefit from the trust’s legacy but the surviving spouse or civil partner and children are usually named as potential beneficiaries. The trust fund will be administered by trustees, who, in most cases, are the persons nominated as executors in the Will.

One advantage of including such a trust, is that the decision as to what extent children will benefit, if at all, is deferred until the first death, when the financial and personal circumstances of the survivor can be ascertained.

Alternatively the assets could be retained in trust in case the survivor should need them. All the while the assets remain in trust, they cannot be taxed as part of the survivor’s estate, as the survivor does not have an absolute right to trust assets.