Welcome, residence 'nil-rate band

Never has there been ?a more turbulent ?period for inheritance tax (IHT) than the last ten ?years. The shelving of three years of consultation on the ‘simplification’ of the tax has brought forth one of the most complex pieces of legislation: the advent of the residence nil-rate band (RNRB), from ?6 April 2017. 

Now that the Finance Bill ?(No. 2) 2015 has been enacted, where a person leaves a property that has been their residence ?(or assets equivalent to the value of a residence owned on the day of the Summer Budget, 8 July 2015) to a direct and therefore qualifying descendant (class widely defined), then an additional RNRB – rising to £175,000 by 2020/21 – can be claimed on the IHT value of their estate. The relief is tapered away on estates in excess of £2m and is transferable between spouses and civil partners. 

So, what does this mean for our clients? What steps do estate planners need to take now? Well, nothing in haste. With 18 months before the RNRB comes in, there’s still time for legislation to change. Assuming there are no changes, how can we reassure our clients ahead of 2017?

Straightforward wills

For clients with simple wills that leave everything to their spouse (or civil partner) and then to children (with substitution to grandchildren), no action is needed. For clients with more complex wills, e.g. leaving everything to each other outright and then to a discretionary trust on the second death, again, no action is needed now. Provided that the trustees exercise their power under section 144 of the Inheritance Tax Act 1984 within two years of death to give an outright interest to a qualifying descendant, the additional RNRB can be claimed. Some guiding letters of wishes will need to be reviewed, though.

Qualifying interest

The danger area is where ?clients leave spouses a ?qualifying interest in possession in their estate followed by a discretionary trust. Although the RNRB will be available where the residence is held in a qualifying interest in possession (QIIP) ?trust, it will only be available where there is an outright interest passing to qualifying descendants immediately following the life tenant’s death. 

Discretionary trust

Section 144 will not operate where a discretionary trust follows an immediate post-death interest (IPDI) or other QIIP. Trustees will need to consider the trust carefully and, where appropriate, exercise their powers of appointment during the life tenant’s lifetime to ensure sufficient interest in the property passes outright to the qualifying descendants on the life tenant’s death. Or, wills could be drafted now giving an IPDI followed by an outright interest, but with an overriding power ?of appointment during the life tenant’s lifetime to revoke that outright interest before it vests. As with all planning, the tax tail need not always wag the dog.

In-motion wills

What is the position where the first spouse has died before 2017, creating a QIIP trust that is currently being administered? This should be reviewed to see ?if there is a property or assets that qualify for the new relief once the law is final and if there is any deed of appointment signed before the new law comes into effect.

And what if the first death is on or after 6 April 2017? The same considerations apply. The appointment must be made swiftly before the second spouse’s death. But what if, ?on the second death, there are properties that qualify in both the trust and the life tenant’s ?free estate? The life tenant’s executors alone have power to decide which property should claim the RNRB, but if the trust property is of higher value than that in the estate, it may benefit the beneficiaries under both the will and the trust if the claim is for the trust property.

As if all this were not ?enough, there will be further provisions where a property has been sold or given away during the testator’s lifetime. In brief, provided assets representing ?the value of the property owned on 8 July 2015 are retained in ?the estate, the RNRB can still be claimed. Personal wealth lawyers will need to work with their property counterparts to ensure the right documents are retained securely.

Picture that will-packet, ?once so slim, containing the will, perhaps a codicil or two, and a letter of wishes. To it has been added the deceased spouse’s grant of probate, IHT account, estate accounts, marriage certificate (to facilitate the transferable nil-rate band claim), and now also full details of properties owned in July 2015, subsequently sold or transferred by gift, completion statements, evidence of ownership (e.g. office copies), and details of use as a residence. If IHT is ‘simplified’ any more, we will have to buy bigger envelopes.

Vicky Day is a senior associate at Thomas Eggar @ThomasEggarLLP www.thomaseggar.com