With the residence nil rate band (RNRB) seeing an uplift earlier this month, it’s now more important than ever to ensure that your clients are made aware of their eligibility.
Among a number of professionals, there is a lack of certainty around circumstances where a property is left into a discretionary trust, with a general assumption that it will not be eligible for the RNRB. However, this is not always the case.
On top of the existing inheritance tax (IHT) allowance of £325,000, the RNRB provides an additional amount; from 6 April 2018, the band will rise by a further £25,000, taking it up to £125,000. By the tax year 202-21, a couple will have a collective tax free allowance of up to £1 million.
Someone’s estate will be eligible for the RNRB if it includes an interest in their main property of residence and is left to direct descendants.
Any unused allowance can be transferred between married couples or civil partners, much like the existing nil-rate threshold.
It’s worth noting that for the purposes of the RNRB, ‘inherited’ refers to gifts by will, that which is a result of intestacy as well as any jointly owned assets which pass to the surviving owner.
Where a gift is made into certain types of trust, such as discretionary, the RNRB may not apply, simply because beneficiaries are not trusted as the property’s beneficial owners.
There are, however, a number of ways in which the RNRB can be accessed, even if a discretionary trust has been created.
- Placing a deed of variation in place within two years of death as this can avoid the trust being created. However, as all parties must agree to this, it can cause problems if the trust applies to unborn generations.
- Under s 144 of the Inheritance Tax Act 1984 (IHTA), the trustees could make an appointment of the residential property to lineal descendants. This must be made within two years of death.
- Under s 144 of the IHTA, the trustees could make an RNRB gift post-death. This will be treated, for the purposes of IHT, as if the assets had simply been left outright, provided that the trust is unwound within two years of death. The same would apply if an interest in possession was created, but rather than an outright appointment, it will be treated as if the will had conferred an immediate post-death interest.
To find out more about the residence nil rate band, please click here.
