The residential Nil Rate band (RNRB) and Trust protection 

You CAN have your cake and eat it too! 

Who is likely to be affected

Firstly, Individuals with direct descendants and a main residence valued above £350,000 and secondly married/civil pertners with direct descendants who have a combined estate (including a main residence worth £350,000 or more) of more than £650,000 and thirdly personal representatives of deceased persons.

General description of the measure

This measure introduces an additional nil-rate band when a residence is passed on death to a direct descendant.

This will be:

  • £100,000 in 2017 to 2018
  • £125,000 in 2018 to 2019
  • £150,000 in 2019 to 2020
  • £175,000 in 2020 to 2021

It will then increase in line with Consumer Prices Index (CPI) from 2021 to 2022 onwards. Any unused nil-rate band will be able to be transferred to a surviving spouse or civil partner.

The additional nil-rate band is also available where a person downsizes or ceases to own a home (after 8 July 2015) and assets of an equivalent value, up to the value of the additional nil-rate band, are passed on death to direct descendants.

There will be a tapered withdrawal of the additional nil-rate band for estates with a net value of more than £2 million. This will be at a withdrawal rate of £1 for every £2 over this threshold.

The existing nil-rate band will remain at £325,000 from 2018 to 2019 until the end of 2020 to 2021.

Operative date

The measure will take effect for relevant transfers on death on or after 6 April 2017. It will apply to reduce the tax payable by an estate on death; it will not apply to reduce the tax payable on lifetime transfers that are chargeable as a result of death.

The main residence nil-rate band will be transferable where the second spouse or civil partner of a couple dies on or after 6 April 2017 irrespective of when the first of the couple died.

Proposed revisions to existing law

The qualifying residential interest will be limited to one residential property but personal representatives will be able to nominate which residential property should qualify if there is more than one in the estate. A property which was never a residence of the deceased, such as a buy-to-let property, will not qualify.

A direct descendant will be a child (including a step-child, adopted child or foster child) of the deceased and their lineal descendants.

A claim will have to be made on the death of a person’s surviving spouse or civil partner to transfer any unused proportion of the additional nil-rate band unused by the person on their death, in the same way that the existing nil-rate band can be transferred.

If the net value of the estate (after deducting any liabilities but before reliefs and exemptions) is above £2 million, the additional nil-rate band will be tapered away by £1 for every £2 that the net value exceeds that amount. The taper threshold at which the additional nil-rate band is gradually withdrawn will rise in line with CPI from 2021 to 2022 onwards.

The legislation will also extend the current freeze of the existing nil-rate band at £325,000 until the end of 2020 to 2021.

Where part of the main residence nil-rate band might be lost because the deceased had downsized to a less valuable residence or had ceased to own a residence on or after 8 July 2015, that part will still be available provided the deceased left that smaller residence, or assets of equivalent value, to direct descendants. However, the total amount available will not exceed the maximum available residence nil-rate band.

How this impacts on Trust protection

The problem 

If you are single and own a main residence over £350k or you are a couple owning a main residence over £350,000 and your combined estate is worth over £650k, transferring £175k or more (per person) of the value of this property into a Property Probate Trust would have the effect of completely eradicating your personal RNRB benefit.

We already only transfer a % of a property into Trust if its value will take a client over the personal or dual nil rate band threshold anyway. Do remember that it is the legal responsibility of a client to advise us of the correct value of their property. If in doubt get a formal valuation done from which we can rework figures supplied and advise on the best strategy going forwards accordingly. Advising us of the correct legal ownership of a property is also the responsibility of a client as Trusts are created first and then we go to the Land Registry to conduct conveyancing – it would be at this point only that any anomaly would be found regarding ownership and the Trust (already created) would need to be altered or perhaps not be able to be effected, which, because the work had already been done, would not enable any refund to be given, so please take care in this regard.

There are therefore only 3 effective strategies in this instance to maximise the RNRB and/or protect the integrity of the property against loss while always remembering the rules for deliberate deprivation of assets (see our website and advice sheets regarding this).

  1. (For Couples) - Sever the tenancy, create 2 Property Probate Trusts and convey just 2.5% (example) of the property value into each Property Probate Trust while at the same time creating 2 life interest Trusts within each Will (with each partner and a legal entity/non-beneficiary being Trustee(s)) enabling the surviving partner to remain in the whole property while not inheriting directly the part of the domicile previously owned outright by the deceased spouse. If the surviving party were then to go into care they would not own 100% of the property and therefore the property could not be able to be forced to be sold. The property would then be able to be rented out by the Attorneys for Property and Finance (that would have been created when implementing our pack 1 strategy) and up to 95% of the resulting rental income readily taken by the cash strapped local Authority in favour over implementing a charge on just 47.5% of the property. Non property based assets could be left directly to Children or Grandchildren on first death or all or part could be left directly to the spouse depending on need, however, advice should then be sought from our FCA regulated Probate IFA regarding the sheltering of any funds from potential future attack that have been passed directly to the Spouse while ensuring at the same time that they all pass directly upon second death to direct descendants. In this instance then so long as the beneficiaries of the Life Interest Trusts were direct descendants:

(a)  The integrity of the property will be kept intact and completely passed down upon 2nd death to those nominated and not lost during life (the descendants would also be the Beneficiaries of the 2 Property Probate Trusts).

(b) up to 95% of the RNRB will be able to be used against inheritance tax

2. (For single people) - Transfer just 5% of the value (example) of the property into a Property Probate Trust and leave your whole estate through your Will to your Children or Grandchildren (remembering the rules on deliberate deprivation of assets) using a non descendant or official entity as Executor. If you then go into care your property will be rented out by your Attorneys for Property and Finance (that would have been created when implementing our pack 2 strategy) and 95% of the rental yield after tax paid directly to the Local Authority thus avoiding a charge being placed on the property (5% of the rental yield will go into your Trust which will typically pay 40% tax on this small amount). The outcome will then be:

(a) The integrity of the property will be kept intact and completely passed down upon death to those nominated and not lost during life (the descendants would also be the Beneficiaries of the Trust).

(b) up to 95% of the RNRB will then be able to be used against inheritance tax

3. (For single or couples) - Transfer as much of the property under the standard NRB as is sensible (allowing for growth) into a Property Probate Trust and take out a whole of life insurance Policy that will pay into a life insurance Trust and will enable the Executors to immediately pay off any Inheritance Tax liability. The same outcome will be affected.

For more information on this subject please call us on 0800 668 11 64