RNRB: Coping with downsizing

The downsizing provisions for the residence nil-rate band (RNRB) are a curious phenomenon. Proposals were announced on 8 July 2015, ?a key date to which the provisions will be backdated, with the original RNRB plans. This recognised the need to avoid any disincentive to downsize to a smaller property or to sell to go into a care home. We were told provisions would be brought in by later legislation, though it was unclear how it would be done.

The main RNRB legislation, passed in November in the Finance (No 2) Act 2015, introduced nine complex new sections to the Inheritance Tax Act 1984 (IHTA). Unbelievably, within days of being added to the statute book, seven of these sections are substantially amended by the Finance Bill 2016, which adds another five new sections to the IHTA. The use of 14 new sections to achieve this policy seems horrendously complex.

The curiosity here is that we have known for months that some provisions would take effect from July 2015, while the main provisions only take effect for deaths from 6 April 2017. We cannot just wait for that date, as the profession has been on notice that we may need to make downsizing claims for transactions since last summer. So, what do we need to do?

Downsizing addition

There are three situations where clients can claim the ‘downsizing addition’:

Sale to ‘downsize’ to a lower value property, provided the new property and an equivalent value of ‘lost’ RNRB is left to be ‘closely inherited’ (the wide definition of descendants). The draft new section 8FA of the IHTA introduces the new concept of ‘low-value death interest in home’. Note that it is a lower value property, not necessarily a smaller one (the normal meaning of ‘downsizing’), so could involve, for example, selling a three-bedroom house for £500K and moving to a four-bedroom house for £300K in a cheaper area; 

Selling an only residence and moving to a rented or care home. Again, there is a proviso that the sale proceeds or equivalent value is left to be closely inherited. The draft new section 8FB deals with ‘no residential interest at death’; and

A residential property interest disposed of by gift – not just sale – can amount to a ‘qualifying former residential interest’ for the purpose of the draft amended new section 8H (again with a similar proviso).

Can private client lawyers liaise with residential conveyancing colleagues about these three situations to keep records for future reference? We need to tread carefully. The responsibility for producing evidence supporting an RNRB claim, whenever that may arise, must rest with clients. Solicitors may be wary of seeming to assume an obligation here, so advice to clients might start with a recommendation that they ?keep records for future reference, then an offer to keep those documents, if required, with original wills in the firm’s?strong room.

Some conveyancers will also have letters of engagement making it clear their service does not include tax advice. That is a typical, and wise, exclusion, as many clients caught unawares by a capital gains tax (CGT) liability on selling some land might try to say their solicitor should have warned them. Some firms will have CGT expertise available, but if advice is required it should be within agreed limits, extending the retainer for agreed additional fees.

So, where does helping clients with a future inheritance tax claim sit with this? Solicitors can warn clients their situation may be relevant to a future tax claim, that records may be needed, and that they could save a lot of future time and cost by simply keeping hard copies of relevant documents in a safe place, with the original will. While many or all of these may be accessible from a file, or even an online system, it will be far easier to have hard copies in the right place when death occurs (and ensure they’re not overlooked). ?If this also helps build client loyalty, by showing we are thinking long term and helping with proactive advice, and that we can be there for them when the need arises, so much the better. 

Record keeping

What records should be kept? The completion statement, obviously, but also a copy of the registered title before the transfer, any declaration of trust that was in place pre-transfer, and the TR1 form (transfer of registered title). All could be valuable, especially where properties are jointly owned by individuals or with trusts. 

What about evidence that the property was a residence of the client (who will be deceased by the time these documents are needed)? A statement could be added, signed by the client(s), confirming that this was a residence between specified dates. It doesn’t need to be a main residence, so this could even mean adding a note about having lived there alongside another home, for example, if working in a city with a country home. Practice will develop, with time, but action ought to be taken now to catch tomorrow’s downsizing arrangements.

John Bunker is head of private client knowledge management at Thomas Eggar @ThomasEggar www.thomaseggar.com