Inheritance Tax and the Residence Nil Rate Band
(IHT & the RNRB)
From 6/4/17 every client will get an extra 100k allowance on top of their normal 325k NRB for IHT. A further 25k is to be added each year until Apr-20 when the RNRB will be 175k, + 325k makes the 500k promised by the Tory party policy objective. Couples with children can then get 1M but there are conditions attached.
There must be a ‘qualifying residential interest’ in the family home and it must be left to ‘lineal descendants‘ to get the RNRB. If it is put into a DT, Discretionary Trust either during lifetime or via a Will, then it will eventually be transferred to the descendants at the discretion of the Trustees, rather than by the client directly and accordingly will not qualify for the RNRB.
The available RNRB will be limited by the value of the family home, and if the total estate exceeds 2M then the RNRB is reduced on a sliding scale to the point where there is no extra allowance if the estate is above 2.7M in Apr-20. The RNRB will only be relevant to clients with a single NRB and assets above 325k but less than 2M, and for couples with assets above 650k and below 2M.
Where Mr dies and leaves everything to Mrs, she will gain his transferable NRB & RNRB. If a couple have moved to a smaller property, there are ‘downsizing provisions‘ to calculate the amount of relief that can be claimed.
Wealthy clients will now face a dilemma
They may be more concerned about keeping their assets in the bloodline and making use of either a DT, Discretionary Trust on second death to retain assets or FAPTs, Family Asset Protection Trusts during lifetime which help to avoid IHT/ each others care costs/ grant of probate costs/ children inheriting at the wrong time/ solving the childrens IHT etc. Other options are available to deal with the value of assets over the NRB and subject to IHT such as using BPR relief where given the 2 year period of investment, these assets can simply be transferred to the FAPT IHT-free thus avoiding the need to use the RNRB, or even having to wait 4 years for it to be fully implemented.
Where assets are left in trust, only an IPDI, disabled persons trust, 18-25 trust and bereaved minor trusts will qualify, conversely as already stated a DT is excluded even if the only beneficiaries of it are lineal descendants, however it is still possible to use a s144 deed of appointment out of the Trust within 2 years of the date of death to claim the RNRB. This will present some clients with a dilemma about which is their greatest enemy, protecting bloodline assets in trust or solving their IHT liability? Understanding the consequences of your options is an important step towards getting the right plans in place.
One final thought
Married couples benefit from spouse exemption on a first death scenario which defers the IHT to second death, remember that there are far less planning options available on second death to deal with the problem, meaning that planning advice needs to be taken early and implemented well in advance, there are IHT planning options that take either 7, 2 or 0 years to put in place and much depends on the type of assets held, the clients attitude to risk and motivation to solve these problems.
If you would like our help, contact us here to arrange a fact finding meeting.