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To RNRB or not to RNRB, that is the question.

View profile for Ben Taylor
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Back in August, Elizabeth Young wrote about the introduction of the new Residence Nil Rate Band (available here) and noted some of the limitations, particularly for those who don’t have children and where the estate is worth more than £2m.

Despite the fact the relief won’t be introduced until April 2017, it's clear planning has to start now if you want to take advantage of the new nil rate band. So, on that note, here are few more pitfalls to watch for.

Trusts and the RNRB

Discretionary trust wills can be useful in estate planning because of the flexibility they afford, for asset/beneficiary protection and/or for tax planning purposes. Unfortunately, having your property fall into a discretionary trust on death can mean that the RNRB isn’t available.

For instance, if your home falls into a discretionary trust, even where your children are the named beneficiaries, RNRB won’t be available. The legislation provides that the property needs to be inherited by your lineal descendants, and unfortunately, the definition of “inherited” doesn’t include discretionary trusts.

So what do you do? Well a balance needs to be struck between sensible succession planning and practicality, and tax planning. It may be that flexibility or trust protection is needed and that a trade-off is required, or you may consider changing your Will. Alternatively you might like to leave your options open and rely on an appointment out of the trust within two years of death. In that case, it might be worth changing any instructions you have for your trustees, alerting them to the fact that they may need to act quickly after your death to take advantage of the RNRB.

Cohabitees and the RNRB

It’s becoming apparent that the RNRB doesn’t help couples who cohabit and have children from outside the current relationship, say, from a first marriage.

It’s a bit easier to talk about this with an example, so let me introduce you to Jack and Jill, an unmarried cohabiting couple, who are both divorced. Jack has two children from his first marriage, and Jill, three. They moved in to Hill Cottage together five years ago, and own the property equally as tenants in common. Jack and Jill have sat down together and decided that Jack’s assets will pass to his children and Jill’s to her children, when they die.

However, they want to make sure the survivor can continue to live in Hill Cottage for the rest of their lifetime, or be able to use it to pay for care. After that, each will pass their share on to their respective children. Typically, we might look to achieve this by leaving Jill a life interest in Jack’s half of Manor Cottage, to cement her right to live in the property and enjoy its income if necessary, and vice versa.  

If Jack dies first, as Jack and Jill aren’t married his share of the house won’t pass to her via the spouse exemption. Indeed, subject to the value of the rest of Jack’s estate, his share of the house may even fall to be taxable.

When Jill dies, the whole of Hill Cottage will be valued in her estate, but only half may benefit from the RNRB - her half. Jack’s half however won’t benefit from Jack or Jill’s RNRB - because when Jill dies and her life interest ends, Jack’s half doesn’t pass to her lineal descendants.

That may mean that Jack’s interest in the property is hit twice with inheritance tax, depending on the value of Jill’s estate. Though, if there is inheritance tax to pay, a proportionate amount of tax will be due from Jack’s Will trust.

Things can get worse still. Jill won’t be able to use any of Jack’s unused RNRB because Jack and Jill weren’t married, which means if Jill’s share of Hill Cottage was worth more than her RNRB, it might be subject to IHT.

There may be alternatives for Jack and Jill, but it will be a balancing act between tax planning and what works for them and their family. Whether this leads to crazy scenarios where Jack and Jill feel they need to get married or adopt each other’s children, who knows?!

APR, BPR and the RNRB

As you will have seen from Elizabeth’s blog, where the net value of an estate exceeds the taper threshold of £2m, the RNRB (including any transferred RNRB) is reduced by £1 for every £2 the estate exceeds that amount.

The estate is valued according to Section 5 of the Inheritance Tax Act 1984, which is everything you beneficially own just before you die after deducting liabilities; but that is before you deduct exemptions and reliefs such as Agricultural Property Relief (APR) and Business Property Relief (BPR). This is of particular significance to our agricultural and commercial clients who have estates that won’t be subject to IHT because of these reliefs, but who may lose the benefit of RNRB (and that £1m IHT promise!) due to the way in which the estate is valued.

What can you do? Speak to our Private Client team for a start. Any steps taken to qualify for the RNRB will likely require careful thought, particularly with regard to how they fit into your succession and tax planning strategy.