New tax legislation was introduced which may result in a reduction of the amount of Inheritance Tax (IHT) you pay on your demise should you have a taxable estate. As part of our continued commitment to you and your beneficiaries, we need to review your existing planning to ensure that you do not miss out on the reduced IHT, assuming that you are eligible.

What is the Residential Nil Rate Band (RNRB)?

The RNRB, or the Residential Nil Rate Allowance (RNRA), as it is referred to in some publications, is a new tax allowance in addition to the existing Nil Rate Band (NRB) Inheritance Tax allowance. The NRB allows you to leave up to £325,000 per person to anyone other than your spouse, civil partner or charity without paying IHT.

The RNRB is being introduced in stages over the next 4 years. In the first year (2017/2018), the allowance is £100,000 per person. The allowance then increases by £25,000 each year for the next 3 years, so from 2020/2021 the allowance is £175,000 per person, and therefore for a married couple the allowance will be £350,000, potentially a further £140,000 in IHT mitigated. 

What does this mean for you?

The RNRB is a valuable allowance; if claimed in the first year, this could mean a reduction in Inheritance Tax (IHT) of £40,000 per person, rising to £70,000 per person by year four.

How do I/ we qualify for the RNRB?

To qualify for the RNRB, you must first have, at the date of death, or have had a house that you have lived in at some point prior (“the Property”) and secondly, you must leave all or sufficient part of the Property to a linear descendant absolutely or leave such a relative an interest in possession in the property. Countrywide Tax & Trust Corporation Ltd (CTTC) would always advise giving the descendant an interest in possession in the property, as this could provide additional protection of the property for future generations against third-party claims (divorce, bankruptcy, tax, care, etc.). Leaving the property absolutely to beneficiaries in a will leaves it open to third-party attack and may increase the tax payable by your descendants in the future.

There are further nuances to the RNRB that need to be understood.

1. The downsizing arrangement, There are arrangements that may allow you to claim the allowance where you used to own a home of higher value than the one owned at the date of death.

2. If your total estate (this will include business and agricultural assets that may be “tax free” on death) exceeds £2 million, the RNRB begins to reduce, and the new allowance may be lost completely.

We are also available to be contacted for further discussion if you would like additional help on what is a very complex piece of legislation.

Is my existing planning correct?

Whatever planning you currently have in place, it is not certain that it will allow your executors to claim the RNRB; it will invariably be made more efficient in maximising this relief. It is therefore essential to get your planning assessed and make what might be minor changes to reduce any IHT on your death.

Discretionary trusts such as the “family trust” are the most effective way to protect your estate for your intended beneficiaries and, as far as possible, ensure your hard-earned wealth remains within your family(ies). However, to qualify for the RNRB, these trusts need to be modified to create the interest in possession for the relevant beneficiary(ies).

It is unfortunate that the legislation has been draughted in such a complex fashion. This complexity means that the majority of wills require some change. The same tax advantages could have been achieved by simply raising the current NRB, and in that instance no changes to existing wills & trusts would have been necessary, but the government chose not to take the easier and most cost-effective route for you but almost certainly the best propaganda for the least reduction in tax intake.

As a valued customer, we are offering a very competitive price to complete the necessary changes to ensure your family qualifies, if possible, for the reduction in IHT with the introduction of the RNRB.

This could also be an opportunity for you to update your wills and trusts for minor cosmetic changes such as changes of names and addresses at the same time.

Listed below are the suggested options that are available to you to ensure that, where applicable, the RNRB can be claimed.

Option 1

Do nothing. There are two sections in legislation that can allow professionals to change a will by variation (Section 142.IHTA.1984 Deed of Variation) and distribution or appointment from Trusts (Section 144.IHTA.1984) that could be used after your death to effectively change your will and trusts to allow them to qualify for the RNRB and maximise tax reliefs.

If you consider this as the best option for you, then you should consider appointing a professional as executor and trusts to ensure you have the correct people in place when the time comes. The costs on your demise to draft the Deed of Variation (DOV) and appointments under Section 144 could, however, run into thousands as opposed to a few hundred pounds to make changes now, as listed below in Options 2 or 3.

It may also be worth noting that the government can change legislation in the future, and so it is possible that Sections 142 and 144 are not available at the date of your death.

Option 2

Change your Will/s to include a legacy of the RNRB in the Will which directs the RNRB to your current Family Trusts. If this is done, a Deed of Variation will not be required after your death, but the use of Section 144 would be required to ensure the Family Trust qualifies for the RNRB. It would be recommended to appoint a professional trustee on any trusts to ensure that this work is completed correctly within the legal timescale of two years from the date of death.

These changes could reduce the costs for the section 144 appointments to hundreds of pounds rather than the thousands in Option 1 above.

Option 3

Changes to the Will/s to include the RNRB Legacy being left to the Trust.

Change your current family trusts that will not automatically qualify for the RNRB to the Flexible Family Trust. The Flexible Family Trust has all the advantages of your current Family Trust to give your family maximum protection of the assets left to them whilst also qualifying for the RNRB.