Nil-Rate-Band Legacies

October 22, 2015

Since the introduction of the transferable nil-rate-band (NRB) by the Finance Act 2008, NRB legacy clauses and NRB discretionary trusts have become less and less common. However, in the situations where such clauses are required, care must be taken when drafting them. This is highlighted in the case of Woodland Trust v Loring [2014] EWCA Civ 1314.

In Woodland Trust v Loring the testatrix made a will in 2001 which set aside out of her residuary estate “…cash of an aggregate value equal to such sum as is at the date of my death the amount of my unused nil-rate band for inheritance tax” for her children and grandchildren. The residue was to go to the Woodland Trust charity. On her death in 2011 the value of her estate totalled £680,805.00 and the NRB available at the time was £325,000.00. The Woodland Trust argued that they were therefore entitled to £355,805.00 from the estate.

The executors, however, made use of Section 8 of the Finance Act 2008 and applied to transfer the NRB of the testatrix’s late husband, thus increasing the tax-free value of the estate to £650,000.00. The beneficiaries argued that the legacies to them should total £650,000.00, leaving the Woodland Trust with a mere £30,805.00.

This interpretation was contested by the Woodland Trust, they raised the argument that the use of the word ‘my’ in the testatrix’s will meant that only her own NRB was available – the transferrable NRB was not hers and therefore should make no difference to the distribution of her estate. The charity also argued that it could not have been the intention of the testatrix that the amount of the legacy should be determined by the executor’s discretion over whether to claim the transferable NRB or not.

The trial judge, in the first instance, was of the view that the intention of the testatrix was to leave her children the maximum amount, free of inheritance tax, with the remainder then passing to the Woodland Trust. It was held that a transferable NRB varied the amount of the legacies in much the same way as an increased individual NRB would have.

The decision was appealed to the Court of Appeal. The Court of Appeal was of the view that the testatrix would likely have been aware that the NRB value would increase between the time of making her will and her death. Therefore, it could not be held that the value of the legacy to her children and grandchildren was the amount of her available NRB at the time of making her will. The decision of the trial judge, that the will should be interpreted to include the transferable NRB, was therefore unanimously upheld.

Although in the Woodland Trust v Loring case the testatrix’s will was made seven years before the introduction of transferrable NRBs, caution should still be exercised when drafting wills with NRB clauses.

Solicitors should discuss with their clients as to whether they want a transferrable NRB to be included in their will. HMRC in its ‘Inheritance Tax Manual’ sets out examples of clauses which would and would not include the transferrable NRB, and also advises to explicitly state in the clause whether it is intended that the transferrable NRB is included or excluded. Solicitors should also discuss with their clients what they want to happen should the NRB value increase, as it is possible to put a limit on the size of the NRB legacy (for example, as a percentage of the estate).

Should you wish to discuss any of the issues raised in this article then please contact the Private Client Department who will be pleased to advise you.

Please note; the content of this article is for information purposes only and further advice should be sought from a professional legal advisor before any action is taken.