‘FAs 2015 and 2016 have introduced a residence nil-rate band which enormously complicates the drafting of wills…’ ‘Drafting Trusts And Will Trusts – A Modern Approach’, by James Kessler QC & Charlotte Ford (13th Edition) (December 2016) (‘Kessler’).
‘Although the intention is to ensure that the house can be passed on death with the benefit of the additional nil rate band, this is not how the rules work. The extra nil rate band is set off against the chargeable estate and so reduces the total tax bill charged on that estate. But, of course, there may still be tax payable and it may still be necessary therefore to sell the house to pay the bill!’ ‘The residence nil rate band – some preliminary comments’ by Chris Whitehouse, P.C.B. 2015, 5, 212-215 (‘Whitehouse’).
The maximum allowance is:
£100K in 2017/18;
£125K in 2018/19;
£150K in 2019/20; and
£175K in 2020/2021.
Thereafter the RNRB will rise in line with the CPI.
The amount of the RNRB is limited by the value of the residence, so the RNRB cannot exceed the value of T’s chargeable estate.
APR/BPR, and any debts or charges on the residence are deducted prior to calculation.
The maximum RNRB is subject to tapered withdrawal where the value of the Testator’s (T’s) estate exceeds £2 million.
‘This means that a taxpayer with an estate at death of £2.35m will not benefit from the residence nil rate band. It is to be noted … that the value of the estate for these purposes is the net estate: i.e. after the deduction of permitted liabilities but before exemptions and reliefs (e.g. the spouse exemption; APR and BPR)’. Whitehouse.
The taper withdrawal is calculated by deducting the taper threshold from the value of the estate. This figure is then deducted from the default allowance and divided by two. The default allowance is the total of the RNRB (i.e. residential enhancement) in force at T’s death plus any brought forward allowance.
The maximum amount and taper threshold is subject to indexation increases by reference to the CPI. The earliest increase will be in 2021/22.
For married couples and civil partners any unused RNRB can be transferred when the surviving spouse or civil partner dies after 5 April 2017.
If the RNRB was not fully used when the first of the couple died, the unused percentage can be transferred to the surviving spouse or civil partner’s estate. This is transferred in a similar way to the existing NRB.
The amount of the transferable RNRB is capped at an additional 100% of a surviving spouse’s available RNRB but more than one pre-deceased spouse’s RNRB can be transferred.
It is the unused percentage of the RNRB that is transferred, and not the unused amount.
Where the first of the couple died before 6 April 2017 their estate would not have used any of the RNRB (because it was not available). 100% of the RNRB will therefore be available for transfer unless the value of their estate exceeded £2 million and the RNRB is tapered away.
For estates below the taper threshold, where the value of the RNRB is below the default allowance, the RNRB is available for transfer to T’s surviving second spouse/civil partner ‘S2’, (Section 8E(2) IHTA 1984). Where however the value of the residence passing to direct descendants equals or exceeds T’s default allowance, the RNRB available is the default allowance, so none of the RNRB is transferable to S2.
The RNRB must be claimed (Section 8L IHTA 1984) within 2 years from the end of the month of T’s death, or if later, 3 months from the date when T’s PR’s start to act.
For the purposes of calculating the amount of IHT payable on a death on or after 6 April 2017, the RNRB’ is available where:
(i) T’s estate includes a qualifying residential interest (‘QRI’); and
(ii) all or part of T’s QRI is left to one or more lineal descendants (i.e. is ‘closely inherited’).
(Sections 8D to 8M IHTA 1984).
A QRI (‘residence’) is an interest in a dwelling house (including a garden or grounds of any size) that was T’s residence at any point during his ownership of the residence, and includes foreign property.
Section 8H IHTA 1984 provides,
“residential property interest”, in relation to a person, means an interest in a dwelling-house which has been the person's residence at a time when the person's estate included that, or any other, interest in the dwelling-house.
(3) Where a person's estate immediately before the person's death includes residential property interests in just one dwelling-house, the person's interests in that dwelling-house are a qualifying residential interest in relation to the person.
(a) a person's estate immediately before the person's death includes residential property interests in each of two or more dwelling-houses, and
(b) the person's personal representatives nominate one (and only one) of those dwelling-houses,
the person's interests in the nominated dwelling-house are a qualifying residential interest in relation to the person.
[(4A) Subsection (4B) or (4C) applies where—
(a) a person disposes of a residential property interest in a dwelling-house on or after 8 July 2015 (and before the person dies), and
(b) the person's personal representatives nominate—
(i) where there is only one such dwelling-house, that dwelling-house, or
(ii) where there are two or more such dwelling-houses, one (and only one) of those dwelling-houses.
(a) the person—
(i) disposes of a residential property interest in the nominated dwelling-house at a post-occupation time, or
(ii) disposes of two or more residential property interests in the nominated dwelling-house at the same post-occupation time or at post-occupation times on the same day, and
(b) the person does not otherwise dispose of residential property interests in the nominated dwelling-house at post-occupation times,
the interest disposed of is, or the interests disposed of are, a qualifying former residential interest in relation to the person.
(a) the person disposes of residential property interests in the nominated dwelling-house at post-occupation times on two or more days, and
(b) the person's personal representatives nominate one (and only one) of those days,
the interest or interests disposed of at post-occupation times on the nominated day is or are a qualifying former residential interest in relation to the person.
(4D) For the purposes of subsections (4A) to (4C)—
(a) a person is to be treated as not disposing of a residential property interest in a dwelling-house where the person disposes of an interest in the dwelling-house by way of gift and the interest is, in relation to the gift and the donor, property subject to a reservation within the meaning of section 102 of the Finance Act 1986 (gifts with reservation), and
(b) a person is to be treated as disposing of a residential property interest in a dwelling-house if the person is treated as making a potentially exempt transfer of the interest as a result of the operation of section 102(4) of that Act (property ceasing to be subject to a reservation).
(a) a transfer of value by a person is a conditionally exempt transfer of a residential property interest, and
(b) at the time of the person's death, no chargeable event has occurred with respect to that interest,
that interest may not be, or be included in, a qualifying former residential interest in relation to the person.
(4F) In subsections (4B) and (4C) “post-occupation time” means a time—
(a) on or after 8 July 2015,
(b) after the nominated dwelling-house first became the person's residence, and
(c) before the person dies.
(4G) For the purposes of subsections (4A) to (4C), if the disposal is under a contract which is completed by a conveyance, the disposal occurs at the time when the interest is conveyed.
(5) A reference in this section to a dwelling-house—
(a) includes any land occupied and enjoyed with it as its garden or grounds, but
(b) does not include, in the case of any particular person, any trees or underwood in relation to which an election is made under section 125 as it applies in relation to that person's death.
(6) If at any time when a person's estate includes an interest in a dwelling-house, the person—
(a) resides in living accommodation which for the person is job-related, and
(b) intends in due course to occupy the dwelling-house as the person's residence,
this section applies as if the dwelling-house were at that time occupied by the person as a residence.
(7) Section 222(8A) to (8D) of the 1992 Act (meaning of “job-related”), but not section 222(9) of that Act, apply for the purposes of subsection (6).
The availability of the RNRB depends upon the residence being ‘closely inherited’.
Section 8J(2) IHTA 1984 provides, ‘B inherits the property if there is a disposition of it (whether effected by will, under the law relating to intestacy or otherwise) to B.’ Inheritance must therefore be on death and can be as a result of:
1. the will;
2. the intestacy rules;
4. the Trustees making a RNRB gift post death under Section 144 IHTA (which is read back to the time of death thereby qualifying for the RNRB);
5. the trustees conferring an interest in possession on T’s surviving spouse/civil partner (‘S’) within two years of T’s death, which will be treated for IHT purposes as if the will had conferred an IPDI on S; and
6. a deed of variation (‘DOV’) or disclaimer read-back under Section 142(1) IHTA 1984 (which involves a trap for the unwary).
Section 8K IHTA 1984 provides,
‘(1) In relation to the death of a person (“D”), something is “closely inherited” for the purposes of [sections 8E,8F,8FA,8FB and 8M] if it is inherited for those purposes (see section 8J) by—
(a) a lineal descendant of D,
(b) a person who, at the time of D's death, is the spouse or civil partner of a lineal descendant of D, or
(c) a person who—
(i) at the time of the death of a lineal descendant of D who died no later than D, was the spouse or civil partner of the lineal descendant, and
(ii) has not, in the period beginning with the lineal descendant's death and ending with D's death, become anyone's spouse or civil partner.
(2) The rules in subsections (3) to (8) apply for the interpretation of subsection (1).
(3) A person who is at any time a step-child of another person is to be treated, at that and all subsequent times, as if the person was that other person's child.
(4) Any rule of law, so far as it requires an adopted person to be treated as not being the child of a natural parent of the person, is to be disregarded (but this is without prejudice to any rule of law requiring an adopted person to be treated as the child of an adopter of the person).
(5) A person who is at any time fostered by a foster parent is to be treated, at that and all subsequent times, as if the person was the foster parent's child.
(a) an individual (“G”) is appointed (or is treated by law as having been appointed) under section 5 of the Children Act 1989, or under corresponding law having effect in Scotland or Northern Ireland or any country or territory outside the United Kingdom, as guardian (however styled) of another person, and
(b) the appointment takes effect at a time when the other person (“C”) is under the age of 18 years,
C is to be treated, at all times after the appointment takes effect, as if C was G's child.
(a) an individual (“SG”) is appointed as a special guardian (however styled) of another person (“C”) by an order of a court—
(i) that is a special guardianship order as defined by section 14A of the Children Act 1989, or
(ii) that is a corresponding order under legislation having effect in Scotland or Northern Ireland or any country or territory outside the United Kingdom, and
(b) the appointment takes effect at a time when C is under the age of 18 years,
C is to be treated, at all times after the appointment takes effect, as if C was SG's child.
(8) In particular, where under any of subsections (3) to (7) one person is to be treated at any time as the child of another person, that first person's lineal descendants (even if born before that time) are accordingly to be treated at that time (and all subsequent times) as lineal descendants of that other person.
(9) In subsection (4) “adopted person” means—
(a) an adopted person within the meaning of Chapter 4 of Part 1 of the Adoption and Children Act 2002, or
(b) a person who would be an adopted person within the meaning of that Chapter if, in section 66(1)(e) of that Act and section 38(1)(e) of the Adoption Act 1976, the reference to the law of England and Wales were a reference to the law of any part of the United Kingdom.
(10) In subsection (5) “foster parent” means—
(a) someone who is approved as a local authority foster parent in accordance with regulations made by virtue of paragraph 12F of Schedule 2 to the Children Act 1989,
(b) a foster parent with whom the person is placed by a voluntary organisation under section 59(1)(a) that Act,
(c) someone who looks after the person in circumstances in which the person is a privately fostered child as defined by section 66 of that Act, or
(d) someone who, under legislation having effect in Scotland or Northern Ireland or any country or territory outside the United Kingdom, is a foster parent (however styled) corresponding to a foster parent within paragraph (a) or (b).]’
Where part of a residence is a conditionally exempt transfer under Section 30 IHTA 1984, it is not closely inherited, therefore the RNRB cannot be used, although it can be transferred to S if no charge has been triggered.
The ‘Downsizing addition’
‘If an estate doesn’t qualify for the full amount of RNRB, the estate may be entitled to an additional amount of RNRB, known as a downsizing addition if all these conditions apply:
the deceased disposed of a former home and either downsized to a less valuable home, or ceased to own a home, on or after 8 July 2015
the former home would have qualified for the RNRB if it had been kept until death
at least some of the estate is inherited by the deceased’s direct descendants
The amount of the downsizing addition will generally be equal to the RNRB that’s been lost because the former home is no longer in the estate. It will also depend on the value of the other assets in the estate that are left to direct descendants. But the downsizing addition can’t exceed the maximum amount of RNRB that would have been available if the disposal or downsizing hadn’t happened.
The deceased’s personal representatives must make a claim for the downsizing addition within 2 years of the end of the month in which the person dies. The time limit can be extended in some circumstances.
HMRC doesn’t have to be told when the downsizing move or disposal of the former home takes place. The deceased’s personal representatives can make the claim for the RNRB and any downsizing addition as part of completing the IHT returns. But, it may be helpful to make a note of the details of the move or disposal so that personal representatives are aware of it and have the information available to make the claim accordingly.
Only one disposal of a former home can be taken into account for the downsizing addition. If the deceased disposed of more than one home between 8 July 2015 and their date of death, the personal representatives can choose which disposal is taken into account to calculate the downsizing addition.
There are 5 steps to work out the amount of RNRB that’s been lost:
Step 1. Work out the RNRB that would have been available when the disposal of the former home took place. This figure is made up of the maximum RNRB due at the date of disposal (or £100,000 if the disposal occurred before 6 April 2017) on any transferred RNRB which is available at the date of death.
Step 2. Divide the value of the former home at the date of disposal by the figure in step 1 and multiply the result by 100 to get a percentage. If the value of the former home is greater than the figure in step 1 the percentage will be limited to 100%. If the value of the home disposed of is less than the figure in step 1, the percentage will be between 0% and 100%.
Step 3. If there is a home in the estate on death, divide the value of the home on death by the RNRB that would be available at the date of death (including any transferred RNRB). Multiply the result by 100 to get a percentage (again this percentage can’t exceed 100%). If there’s no home in the estate at death this percentage will be 0%.
Step 4. Deduct the percentage in step 3 from the percentage in step 2.
Step 5. Multiply the RNRB that would be available at the date of death by the figure from step 4. This gives the amount of the lost RNRB…
There may be some lost RNRB where the deceased downsized to a less valuable home but still has a home in their estate on death. This will only happen when the value of the home at death is below the maximum RNRB available to the estate.
The downsizing rules won’t apply if either:
there’s no loss of the RNRB because the value of any home at death is equal to, or more than the maximum available RNRB
the RNRB isn’t available because although there is a home in the estate on death, the home isn’t left to a direct descendant
To see if the downsizing addition applies, you don’t just look at whether the estate qualifies for the maximum RNRB. Instead you have to work out whether the value of any home still in the estate at death is too low to qualify for the maximum RNRB if it was left to direct descendants.
Where the deceased downsized and still had a home when they died, the RNRB for the estate will be made up of both:
The downsizing addition will generally be the lower of:
If only part of the home in the estate is left to direct descendants, that part is used to work out the RNRB. This may also affect the total RNRB for the estate in downsizing situations.’ Inheritance Tax: residence nil rate band (RNRB) published by HMRC 8 November 2016: https://www.gov.uk/guidance/inheritance-tax-residence-nil-rate-band#down-size
The adjustment to the RNRB is based on the difference between the value of the residence that was sold previously and the new one.
To rely on the downsizing rules, careful records need to be assembled and kept of the proceeds of sale (or of the residence value at the date of a gift) so that the ‘lost’ RNRB may be ascertained at the relevant time.
The RNRB cannot be set against IHT on lifetime gifts (failed PET’s).
The RNRB is in addition to T’s main NRB (which is frozen at £325K until the end of 2020/2021, and if a successful claim is made, the unused amount is transferable to ‘S’.
Consideration should be given to the disadvantages of aggregating T’s and S’s estates if this would push the total estate on the second death over the taper threshold.
Basic IHT planning for spouses requires that each should make full use of both NRB’s, which are distinct, operate independently of each other, and are claimed separately.
Holding the residence in a trust
Where the residence is a trust asset, the availability of the RNRB will depend upon the type of trust.
‘If a home is put into a discretionary trust on death, the deceased’s estate won’t qualify for the RNRB even if the beneficiaries are direct descendants of the deceased… The estate may still qualify for the RNRB if the trust meets certain conditions. For example, if the trust has been set up for:
Inheritance Tax: residence nil rate band (RNRB) published by HMRC 8 November 2016.
‘…The residence NRB has an important impact on drafting IPDI trusts. If the deceased had an estate interest in possession in the residence (typically an IPDI under a will trust, or a pre-2006 estate interest in possession) then a beneficiary must become absolutely entitled to the residence, to qualify for the RNRB.
Existing IPDI trusts in common form generally created a discretionary trust after the death of the life tenant. To qualify for RNRB, it is necessary to amend the form of the trusts during the lifetime of the life tenant.’
‘If a property is left on trust for direct descendants, the RNRB will be available only in limited circumstances, for example where they have a right to trust income, or the property is left on particular favoured trusts for children, or on a disabled person’s trust. No RNRB will be available for trusts outside these limited exceptions, such as discretionary trusts or trusts for grandchildren who do not receive the property outright on the deceased’s death, unless it is possible to use a deed of variation [DOV] or trust appointment to re-write the trust terms.’ ‘The residence nil-rate band: Some tips and traps’ Farrer & Co LLP Briefing September 2016.
‘Only trusts that provide for an absolute or immediate interest will attract the RNRB. This will be relevant for clients whose wills include old style NRB discretionary trusts and wills with flexible life interest trusts. These trusts will not attract the RNRB and, indeed, in some cases may result in a QRI being locked away following the first death which would be more efficiently transferred to a surviving spouse outright or instead vesting absolutely (closely inherited) to a lineal descendant following second death…
Discussions should be had with clients about whether the protection or planning benefits of using a contingent trust outweigh the potential loss of the RNRB, and whether they might prefer to use a flexible IPDI with a power to advance capital which includes lineal descendants as beneficiaries or to leave gifts absolutely with no age contingency.’
‘Where are we?’ – Jonathan Shankland and Celia Speller provide an update on the residence nil-rate band, Trusts and Estates Law & Tax Journal, March 2016.
‘If the deceased has an estate interest in possession in the residence (typically an IPDI under a will trust, or a pre-2006 estate interest in possession) then a beneficiary must become absolutely entitled to the residence, to qualify for the RNRB.
Existing IPDI trusts in common form generally created a discretionary trust after the death of the life tenant. To qualify for RNRB, it is necessary to amend the form of the trusts during the lifetime of the tenant . The choices are:
(1) To transfer the residence (or a large enough share of it to use the RNRB) to the life tenant absolutely. That will not usually give rise to CGT, as private residence relief will apply. Then the will of the surviving spouse can deal with the residence.
(2) To appoint that on the death of the life tenant, the residence (or a large enough share in it to use the RNRB) passes to close family absolutely.’
Kessler paragraph 18.5.
The RNRB will be available where T makes a RNRB gift of his residence (up to the value of the RNRB) to a lineal descendant absolutely. A precedent clause is set out in paragraph 18.4 of Kessler.
Where the RNRB is not available because e.g. the residence is a discretionary trust asset, the trustees can restore the RNRB by making a RNRB gift post death under Section 144 IHTA (which is read back to the time of death, and so qualifies for the RNRB). Provided the trust is unwound within two years of death (i.e. by the Trustees appointing the trust assets to S absolutely) this will be treated for IHT purposes as if the assets had simply been left by T to S outright. Alternatively the trustees can confer an interest in possession on S within two years of T’s death, which will be treated for IHT purposes as if the will had conferred an IPDI on S.