The essence of tax planning using a discretionary will trust is to
ensure that the full nil rate band is utilised on first death.
Accordingly, each spouse’s arrangements should mirror the other’s,
since it is not given to us to predict which will die first. If the
first spouse to die has no assets to bequeath, their nil rate band is
wasted in any event!
In order to arrange for a successful “mirror” arrangement, each
will should embody the same type of discretionary will trust, and –
most importantly – each spouse should possess at least £255,000 of
assets which they have legal competence to bestow.
The primary issue here comes from assets owned jointly. Under English
law, there is a clear distinction between “joint tenancy” and
“tenancy in common”. Tenants in common each own a distinct
proportion (most often one half) of the asset, and are free to dispose
of their share howsoever they wish. In particular, their share can be
freely bequeathed in their will.
By contrast, joint tenants are each treated as simultaneously owning
the whole of the asset – on the death of one, the asset passes by
“survivorship” to be entirely owned by the other. The crucial aspect
here is that a joint tenant is not legally competent to dispose of his
or her share in the property to a third party, either by sale, gift or
bequest.
If the family home remains as a jointly owned asset, it will not be
possible for its value to form part of the discretionary will trust on
first death, since it must pass by survivorship to the remaining spouse.
The other assets which the spouses own, either independently or in
common, may not be enough to make full use of both their nil rate bands.
As a result, there is a risk that excessive tax will become payable on
second death.
Fortunately, this issue is simple to resolve. To “sever” joint
tenancy in favour of tenancy in common, all that is required is a
statement signed by both parties, which can be lodged with the Land
Registry. Once this has been done, each will own a distinct 50% share of
the property, which can then be included within their wills.
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