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Residence nil rate band: when should your clients use their relief?

The inheritance tax residence nil rate band (RNRB) came gradually into force from 6 April 2017 and now provides a £175,000 allowance to each individual who leaves their home to their children, grandchildren or their spouses and civil partners.

But when should your clients plan to use this valuable allowance? We look at the options.

Lifetime gifts

Lifetime gifts of the family home are problematic for a number of reasons but clients should also be aware that in many circumstances the RNRB cannot be claimed against a failed lifetime gift. There are exceptions:  if the donor has reserved a benefit from the property given away the RNRB can be claimed. It can also be claimed if the donor leaves other assets to qualifying relatives and the downsizing addition applies.

For example, if Michael in 2019 gives his property to his daughter but continues living there without paying rent he will have reserved a benefit from the gift, the property will form part of his taxable estate on his death and the RNRB can be claimed. If Michael moves out of the house (to a care home perhaps) and dies in 2022/23 leaving £175,000 worth of other assets outright to his children, then the downsizing provisions should allow the RNRB to reduce the inheritance tax (IHT) payable on Michael’s estate. By comparison if George gives his house worth £700,000 to his children, moves out, and leaves negligible other assets on his death to his children, the RNRB cannot be claimed.

On the first death of a married couple

The RNRB is transferable between spouses and civil partners so if it is not used on the first death the surviving spouse can claim both their own allowance and their late spouse’s unused allowance. As with the transferable nil rate band, to work out how much is due to the surviving spouse’s estate the percentage of the unused RNRB on the first death should be calculated and applied to the amount of the allowance in force on the second death.

Example: Christopher and Mary

Christopher and Mary own a property worth £800,000 and other assets of £500,000. Christopher dies in May 2017 leaving all his assets to Mary. Mary dies in 2021. Mary’s estate is entitled to her own RNRB of £175,000 (provided a property, or other assets if the property has been disposed of, has been left to qualifying relatives). Mary’s executors can also claim a further RNRB as Christopher’s unused allowance is transferable to Mary. A full 100% of Christopher’s allowance is unused so 100% of £175,000 can be claimed by Mary’s executors in addition to her own allowance. The IHT payable is £120,000.

By comparison, if on Christopher’s death he leaves a share of the family home worth £175,000 on life interest trusts for the couple’s children, the RNRB of £175,000 could be claimed by his executors. There would, however, be no allowance to transfer to Mary meaning that she could not claim an additional allowance at the possibly higher rate which is in force at her death in 2029.  It may be possible to offset some of this increase in IHT by claiming a valuation discount on Mary’s share of the house to reflect the joint ownership between her and the trust for the children but, if there is no increase in property values, more tax will nevertheless be payable.

Widows and widowers

However, if an individual has been married and widowed before and has re-married it is advisable to use the RNRB on the first death. For example, Timothy and Clare are married. Clare has been married previously to Jeremy who died. If Timothy dies before Clare without using his RNRB, his allowance will be transferred to Clare. In theory, three RNRB allowances are then available to Clare: her own, Jeremy’s and Timothy’s but the legislation limits her claim to a maximum of two allowances. By comparison, if Timothy had used his RNRB on his death by leaving his share of the home, or a part of it, to suitable trusts for their children, Clare could claim her own and Jeremy’s allowance on her death and the couple between them would benefit from three allowances.

Unmarried couples

The RNRB is not transferable between couples who are not married or in a civil partnership. To ensure both allowances can be claimed on the first death a share of the house equal in value to the RNRB should be given direct to the children or to a suitable trust benefitting  them.

On the second death of a couple

In the majority of cases a couple are likely to use their RNRB on the death of the second of them and many couples would prefer the family home to pass into the surviving spouse’s sole ownership. It is essential to review the couple’s Wills to ensure that they are drafted in a way that will ensure maximum entitlement to the relief. Action might also be needed following the second death to preserve the relief. If, for example, the estate is left on discretionary trusts on the second death then to make a claim for the RNRB part or the whole of the home should be appointed out to the children, or onto immediate post death interest trusts for them, within two years of the second death.

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