Nil-rate band trusts were a common feature of inheritance tax planning until 2007. Until then, the estate of a married couple attracted just one nil-rate band, meaning that on the second death (when the surviving partner’s estate usually contained the family home), the family would face a substantial Inheritance Tax liability often resulting in the sale of the family home.
To resolve that problem, nil rate band trusts were created to prevent the loss of the nil rate band of the first spouse to die. Assets to the value of the nil-rate band were placed into trust so they fell outside of the estate of the surviving spouse for inheritance tax purposes.
In recognising the difficult tax position married couples faced, the government introduced the transferable nil rate band and the transferable residence nil rate band, which allowed the unused nil rate band (currently £325,000) and residence nil rate band (currently £175,000) of the first spouse to be transferred to and used by the estate of the surviving spouse, therefore reducing the tax liability on the second death.
It was a move that effectively rendered the nil-rate trust obsolete. But not quite.
As the make-up of families become more complex with children from two or more marriages, greater inherited wealth and the rise of later-life marriages, the nil-rate band trust remains an effective way to ensure children from previous marriages are not accidentally disinherited.
Take, for example, an individual who marries for second time. If they were to leave their entire estate to their new spouse, this could effectively disinherit children from their first marriage (as the surviving spouse might remarry and/or fail to leave any of the assets they inherited to their stepchildren in their Will). However, if they were to include a nil rate band trust in their Will, naming both the surviving spouse and the children of the previous relationship as potential beneficiaries of the trust, this would provide a flexible way of allowing assets to pass to the children (without incurring an immediate IHT liability) whilst also ensuring that, if necessary, sufficient provision could also be made for the surviving spouse.
A nil rate band trust can also be used as part of a tax planning strategy in order to assist the younger generation with education costs. With school fees now attracting VAT, it is becoming increasingly difficult to pay for the costs of a private education. A nil rate band trust can be used as an earmarked fund for school or university fees for children or grandchildren, with the flexibility to distribute funds in line with the educational needs of the younger family members.
Whilst nil rate band trusts are more common in Wills, they can also be set up during an individual’s lifetime, providing yet another opportunity for estate planning.
Contact our Private Client Solicitors
If you are in need of advice or assistance on any of the legal issues mentioned in this article, please contact Olivia Meekin, Partner, or any member of our experienced Private Client team on 020 7631 4141 or email privateclient@bishopandsewell.co.uk
The above is accurate as at 01 May 2025. The information above may be subject to change.
The content of this note should not be considered legal advice and each matter should be considered on a case-by-case basis.
