April 2017 saw the introduction of the Residence Nil Rate Band (RNRB); an additional Inheritance Tax allowance for deaths on or after 6th April 2017. The RNRB available amount increases yearly.
With a further increase to the RNRB effective from April 2018 it is even more important to ensure that your clients are aware of the benefits it could provide.
Having given the allowance then the legislation identifies a number of circumstances where the allowance maybe lost.
The RNRB will be tapered where the net estate exceeds £2m, at a rate of £1 withdrawal for every £2 of value over the £2m. So for example from April 2020, if an estate is valued at £2,350,000, the RNRB will be lost.
Advisors should be mindful of the following issues, as these can all have a significant impact on the estate value:
- Mirror Wills that leave all to Spouse absolutely. The surviving spouse may have reduced or no RNRB available, due to the total value of their estate on death which would include the transferred estate value or additions to the survivors estate caused by the death of others.
- Estates that have business or agricultural assets that get relief from IHT (Business Relief /Agricultural Relief). Although the assets may attract IHT relief, the value is deemed part of the total estate for the RNRB.
If widowed, similar to the transfer of NRB, clients may also be able to transfer any unused RNRB in certain circumstances, even if the first spouse’s death was before the RNRB was introduced.
So when is the RNRB available?
The RNRB legislation states that the value of the new RNRB allowance passes to lineal descendants, either:
• by them inheriting absolutely or
• by a qualifying Interest in Possession trust (IIP) (which means the property is deemed in the IIP Beneficiaries estate for IHT).
However if the RNRB is given absolutely to beneficiaries, then this value is part of the estate of the recipients and at risk from third party threats (such as their future divorce and creditor claims etc) and may generate Capital Gains Tax if the lineal descendant does not live in the property. There could also be IHT on the death of the recipient lineal descendant.
Countrywide Tax & Trust Corporation Ltd (CTTC Ltd) have always endorsed the use of discretionary trusts, as they offer maximum protection to a client’s hard earned assets. However when the RNRB legislation was first announced, the assumption throughout the industry was that discretionary trusts would not be suitable and that the RNRB would be lost. However, this is not necessarily the case and beneficiaries of discretionary trusts are able to claim the RNRB, if the Trustees of the Discretionary Trust make an appointment under Section 144.
A problem can arise with this strategy where the Trustees do not understand what is required before the 2 year limit runs out, and the relief is lost.
To remove the risk of the Trustees forgetting to make an appointment under Section 144 CTTC Ltd offer a Discretionary Trust (drafted in accordance with Counsel opinion) modified in such a way that the following options are available:
1. The Trustees within the 2 year period could make an appointment under section 144 to the most efficient lineal descendant. The decision as to which may be the most appropriate lineal descendant is made after the client’s death with all available information.
2. If the Trustees forget, or are not aware of what is required to claim the RNRB, then the Trust will automatically appoint a lineal descendant, or appoint an interest in possession to the surviving spouse so at least the RNRB can be claimed or passed to the survivor.
And so the Flexible Family Trust was designed.
So what makes the Trust SO good in addition to the advantages already listed?
It can be used for the following classes of clients:
• Married couples and Civil Partnerships
• Single people
• Unmarried Couples
• Clients who today might not qualify for the RNRB but who might in the future due to property price growth.
Why use any other type of Trust to place the RNRB & NRB in other than the CTTC Ltd Flexible Family Trust?
This is the Trust most often sold by CTTC Ltd.
Join our experts in our next FREE webinar. for further discussion on the unique features of this Discretionary Trust and much more.
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This article was submitted to be published by Countrywide Tax & Trust Corporation Ltd. as part of their advertising agreement with Today’s Wills and Probate. The views expressed in this article are those of the submitter and not those of Today’s Wills and Probate.
