When Mr Darling stood up to make his first ever Pre-Budget speech on October 9, very few people could have predicted that he would double the Inheritance Tax nil rate band for couples.

But is this really a case of saving your family more tax or is it simply a case of dressing up something you already had anyway?

Mr Darling has said that if a husband died leaving a widow and he had not made use of his own individual nil rate band, (currently £300,000) then when his widow died, she would be able to use both her nil rate band and that which was unused by her husband, thus effectively giving her a 'double' nil rate band of £600,000 at current rates.

However, before Mr Darling's speech, both partners in a marriage or civil partnership already had access to that double nil rate band through having their wills written to incorporate discretionary will trusts.

In fact, even after Mr Darling's speech, a discretionary will trust is still one of the most effective methods of maximising the amount of your assets that you can pass to your children without suffering Inheritance Tax.

Using a trust also has some other significant benefits over just 'waiting for God' and using the 'Darling method' of Inheritance Tax planning.

The most obvious benefit is that with a will, your assets will go to who you want.

If you die without a will your family may not inherit what you wanted them to and even your spouse may not receive what you or they expected.
But if you make a will, not only can these problems be avoided, but you could also avoid leaving your family a big Inheritance Tax bill.

By incorporating a discretionary trust in your wills, on first death instead of everything being inherited by the spouse, some of the deceased's assets (up to the nil rate band in value) can be held in the trust created by their will. Subject to certain rules, the surviving spouse will still have access to those assets in his or her lifetime.

This is another area where the will trust scores over the 'Darling method', as any growth in the value of the assets placed in the trust, will be outside of the estate for Inheritance Tax purposes.

If you just leave your assets to your spouse, they will not only inherit the assets, but also any growth in the value of those assets. Over time, that growth could erode the real value of having two nil rate bands, as the growth alone could eat up one of those bands.

By using a special IOU clause, the will trustees could also effectively 'lend' the assets in the trust fund to the surviving spouse for his or her remaining lifetime.

In the event of the death of the spouse, the IOU is called in by the trustees. This is another advantage of the trust.

If the trustees lend the spouse £300,000 in cash and he or she spends that money, they will have created a debt on their estate that must be repaid on death to the trustees.

Effectively, the spouse will have created a third nil rate band for the family.

The assets that are recalled back into the trust fund will pass to the ultimate beneficiaries, (i.e. children and/or any grandchildren as appropriate), via the trust and outside of the joint estate, with no Inheritance Tax on that half.

There is another significant advantage to having a will trust. If the husband died leaving his half share of their main residence in his trust and his widow then needed long-term care, the local authority would not be able to sell the family home to pay her care fees.

This is because half the house would still be owned by the trustees, who can refuse to sell. As you can't sell half a house, the local authority would not be able to get their hands on it.


Nick Plumb is an Independent Financial Adviser. Send your questions to him at Bright Financial Planning Ltd, 58 Station Road, Sudbury, Suffolk, CO10 2SP, email them to nickplumb@aol.com or telephone Nick on 01449 675674. Nick's answers to reader questions in this column are provided only as a general guide and do not constitute personal financial advice. Any readers who require specific financial advice on their own position should contact Nick for a complimentary consultation.