The second part of my blog series concerns the new additional nil rate band for Inheritance Tax, known by HMRC as the Residence Nil Rate Band (RNRB), which was introduced by George Osborne in the July budget.
As always with a new allowance of this sort, the devil is most definitely in the detail!
The first point to note is that it does not start until the 2017/18 tax year. The second is that it will not be fully available until the 2020/21 tax year, as it is being phased in over 4 years. These both have implications for any current or proposed IHT planning as I will explain later.
The phasing-in of the new RNRB sees it starting at £100,000 in 2017/18, with increases each year of £25,000 until it reaches the maximum of £175,000 by the 2020/21 tax year, at which point a new Government might be about to take office.
The new RNRB will also be transferable to a surviving spouse / civil partner, as is the main NRB, so achieving the much-trumpeted £1Million allowance (for a couple). It also potentially makes the full joint allowance available to those whose spouses have already died or might die before the full allowance comes into force in 2020/21.
There are a number of potential pitfalls to this new allowance, however, and also a number of planning points that will need to be considered.
The first potential pitfall is that you need to own a property that has a net value (after deducting any liabilities such as a mortgage) at least equal to the new NRB, so £175,000 for a single person or £350,000 for a widow(er) / survivor of a civil partnership.
You are not able to utilise any unused RNRB against other assets. If, for example, a surviving widow owned a home worth £350k and other assets worth £650k, and died in 2020/21, then the new £1Million allowance would be available to the estate and no tax would be due. If, however, the home was worth only £250k and other assets were valued at £750k, the estate would still be worth £1Million, but the combined NRB would be only £900k, so £40k tax would be due.
The second potential pitfall is that it is only available in full for estates with a net value of £2million or less, and is withdrawn at a rate of £1 for every £2 above this threshold, so that it completely disappears for net estates valued above £2.7Million. It also means that there could be compelling reasons for married / civil partnership clients with estates in the £2Million - £3Million range to consider their Inheritance Tax Planning options in order to reduce their estate values over the next few years and be eligible for the new RNRB.
The third potential pitfall is that the main residence has to be left to direct descendants so that the estate can benefit from the RNRB. This has implications for anyone who has decided to nominate a Trust to receive their house on death, especially if it is a Discretionary Trust. It is also a concern for anyone who may have been sold an “Asset Protection Trust” in the past as a means of protecting their assets from being used to pay for long-term care fees, as these were frequently established as Discretionary Trusts. It seems pretty certain that if the main residence is left to a Discretionary Trust, the new RNRB will not be available. This issue does not affect an Interest in Possession Trust, however, which typically involves the spouse / civil partner being granted an absolute right to live in the property for the remainder of their life with other direct descendants as the ultimate beneficiaries.
The fourth potential pitfall is if you are a co-habiting couple (not married or in a civil partnership). In this situation one RNRB could be lost as it is not transferable between co-habitees.
The fifth potential pitfall is that only one residential property can qualify, and buy-to-let or other rental property does not qualify.
Some of the planning points to consider from this new RNRB are:
• Do you have an estate that could benefit from it? If so, do you need to conduct some planning in order to ensure you obtain maximum benefit from the new RNRB in the future?
• Does the phasing-in of the allowance mean you have a potential IHT liability over the next five years? If so you may wish to take out life cover on a temporary basis to cover this potential liability until the full allowance is available. Your adviser can assist with the calculation of the correct sum assured and term for your circumstances.
• Have you previously nominated a Trust to receive your main residence? If so, you need to take legal advice on what the implications are, and whether you can amend the planning to obtain the benefit of the RNRB.
• Are you a co-habiting couple? In this case you may need to review how you own property and the structure of your wills in order to be able to benefit from the RNRB in full.
• Do you own more than one property, for example a main home and a holiday home, that you do not rent out? In this case you may need to make a decision as to which one should be nominated and may need to put this nomination in writing to the personal representatives named in your will.
As always, specialist legal advice may be needed and taken in conjunction with advice from your Financial Planner to ensure you benefit fully from this new allowance.
Please do not hesitate to contact LIFT-Financial if you would like a referral to a legal specialist.