Nil Rate Band Discretionary Will Trust and IHT: How NRB Trusts Work, Pre- and Post-2007 TNRB
An NRB discretionary will trust uses the first-dying spouse's nil rate band (£325,000) to fund a trust on death — rather than passing the full estate to the survivor. Before 2007 this was essential for double NRB planning; since the Transferable NRB it is less critical for tax, but still widely used for asset protection, second marriages, and care fee planning.
How NRB Discretionary Will Trusts Work
The NRB trust structure
A Nil Rate Band discretionary will trust is a clause in a will that directs the executors to settle the testator's available nil rate band amount — up to £325,000 — into a discretionary trust on death. The trust beneficiaries are typically the surviving spouse, the children, and/or grandchildren. The trustees (often the surviving spouse plus an independent trustee) have discretion to distribute income and capital to beneficiaries at any time. The residue of the estate (above the NRB amount) passes to the surviving spouse, exempt from IHT under the spousal exemption. The result: £325,000 is sheltered from IHT in the trust (using the first spouse's NRB), and the spouse receives the balance (spousal exemption). On the second death, the survivor's NRB covers their own estate — so both NRBs are effectively used.
Why NRB trusts were essential before 2007
Before 2007, the NRB was not transferable between spouses. If a husband died and left everything to his wife (under the spousal exemption), his NRB was wasted — the full estate passed tax-free to the wife, but the husband's £325,000 NRB was never used. On the wife's subsequent death, only her own NRB was available against what was potentially a combined estate of £1m+. The NRB discretionary will trust solved this: by using the husband's NRB on the first death to fund a trust (rather than passing everything to the spouse), both NRBs were utilised. Since FA 2008 s8A IHTA 1984 introduced the Transferable Nil Rate Band, the unused proportion of the first-dying spouse's NRB can be transferred to and used by the surviving spouse's estate — making the NRB trust no longer essential for this purpose.
When NRB trusts remain valuable post-2007
Despite the TNRB, NRB trusts are still used in the following situations: (1) Second marriages: the NRB trust ensures assets go to the testator's own children rather than passing to the surviving second spouse who may later leave them to different beneficiaries. (2) Care fee protection: assets in a discretionary trust are not subject to the means-test for care fees (if settled more than 6 months before a care fee assessment). Passing assets to the surviving spouse gives the local authority visibility of those assets in future care assessments. (3) Flexibility: a discretionary trust allows trustees to respond to changing circumstances of beneficiaries — the surviving spouse can benefit if needed, but assets can pass to grandchildren if the spouse is financially comfortable. (4) RNRB interaction: the NRB trust may interact with the RNRB planning where the family home is passing via a separate route.
IHT mechanics: the NRB trust on first death
When the first spouse dies, the NRB trust is funded with assets up to the available NRB (£325,000, reduced by any chargeable gifts made in the 7 years before death). The assets settling into the trust are not chargeable to IHT — they fall within the NRB. No IHT is payable at the first death on the NRB sum. The assets in the trust are then relevant property — subject to the 10-year periodic charge and exit charges in the usual way (though the trust's own NRB reduces the charge). Crucially, because the TNRB has been used (the NRB trust uses the first spouse's NRB), the TNRB available to the second estate is reduced proportionally — the NRB trust 'uses' the first NRB rather than transferring it.
Loan-based NRB trusts (debt or charge schemes)
A common variant of the NRB trust involves the executors 'lending' the NRB amount to the surviving spouse (via an interest-free loan secured by a charge on the matrimonial home), rather than transferring assets directly into a trust. The surviving spouse can continue to live in the home; the NRB debt is owed to the trust (and ultimately to the trust's beneficiaries). On the second death, the NRB debt is deducted from the survivor's estate (reducing IHT), and the trust's debt is paid to the beneficiaries. However, HMRC has challenged loan-based NRB trust schemes that are not genuinely commercial, particularly where the home is passed to the trust at death and there is no genuine arm's length dealing. Specialist legal advice is essential for loan-based NRB trust structures.
Frequently Asked Questions
Is an NRB trust still worth including in a will post-2007?
For straightforward married couple estates where both spouses intend to leave everything to each other and then to their own children, the TNRB effectively achieves the same result as an NRB trust — without the complexity and ongoing trust administration cost. For these families, the NRB trust is no longer necessary. However, for families with second marriages, potential care fee concerns, a desire for asset protection from future claims, or where the estate structure is complex (e.g. business assets requiring BPR protection within a trust), the NRB trust still has planning value. Each situation should be assessed with a qualified estate planning adviser.
What happens to an existing NRB trust set up before 2007?
Many couples set up NRB trusts in the 1990s and early 2000s when the TNRB did not exist. These trusts may now be redundant as planning vehicles — particularly if the first spouse has not yet died and the will can be updated to simplify the structure. Where the first spouse has died and the NRB trust is already funded, it continues as a relevant property trust with its own 10-year periodic charge exposure. Trustees should review whether the trust should be wound up (appointing assets to the beneficiaries) or whether it serves a continuing purpose. A deed of variation can sometimes be used within 2 years of the first death to redirect assets if the NRB trust is no longer appropriate.
Does an NRB trust affect the Residence Nil Rate Band (RNRB)?
Potentially yes. The RNRB (up to £175,000) is available on the first and second death where a qualifying residential property passes to direct descendants. If the NRB trust holds the family home (or a share in it), the RNRB may not apply at the first death — the home is in a discretionary trust (not passing directly to a direct descendant). The RNRB is only available on a qualifying residential property that passes directly to a lineal descendant. However, on the second death, if the property ultimately passes out of the trust to descendants, the TRNRB (transferable RNRB) from the first death may be available. Complex RNRB and TRNRB analysis is required where an NRB trust holds the family home.
Can the surviving spouse be a beneficiary of the NRB trust?
Yes — the surviving spouse can (and typically is) a discretionary beneficiary of the NRB trust. This means the trustees can pay income or capital to the surviving spouse if they need funds. However, the surviving spouse should not have an automatic right to the trust assets (which would make the trust an interest in possession — potentially giving the spouse a deemed ownership of the trust assets for IHT purposes). Keeping the trust as genuinely discretionary — where the trustees can pay to the spouse but are not obliged to — preserves the trust structure and its asset protection advantages. The spouse's interest as a discretionary beneficiary is not an IHT asset in their estate.
What is the 10-year periodic charge on an NRB trust?
As a discretionary trust (relevant property regime), the NRB trust is subject to the 10-year periodic charge. The charge is calculated at a maximum of 6% of the net value of the trust assets above the NRB at each 10-year anniversary. For an NRB trust holding £325,000 of assets with a 10-year periodic charge: if the trust assets have grown to £500,000 by the 10-year anniversary, the charge is 6% × (£500,000 – £325,000) = £10,500 (approximately, using a simplified calculation). In practice, the charge is calculated using the 'effective rate' formula from ss64-66 IHTA 1984. For modest trusts, the 10-year charge is typically modest; for trusts with significant business or investment growth, the periodic charge can be substantial.
Review Your Will for NRB Trust Clauses — Are They Still Right for You?
Many couples have old wills with NRB trust clauses that were drafted pre-2007 and may no longer reflect their current needs. Reviewing and updating your will ensures the trust structure — or its absence — is right for your family now. WillSafe will kits help you document your wishes clearly.
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