The Summer Budget 2015 saw the introduction of the Residential Nil Rate Band which will come into effect for deaths on or after 6 April 2017. The Nil Rate Band (NRB) has been frozen at its current rate of £325,000 until 2021, whilst for estates which qualify, there will be an additional Residence Nil Rate Band (RNRB) of £100,000 from 2017 rising in annual increments of £25,000 to £175,000 by 2020 and then increasing annually by the CPI. For deaths on or after 6 April 2017 the Residential Nil Rate Band will be available where a residence is closely inherited.
What is a residence?
It is not restricted to the main residence and there is no requirement to occupy a property as a residence throughout the period of ownership. There can be more than one residence but only one will qualify for the Residential Nil Rate Band (RNRB) and similarly there may be no residence at the date of death. The downsizing provisions may apply so that the sale proceeds of the last residence may qualify.
What does closely inherited mean?
Closely applies to lineal descendants and includes adopted, step and foster children and following an amendment at committee stage of the bill also includes the spouses/civil partners of a lineal descendant who has predeceased the deceased.
Inherited is defined as being a disposition effected by Will, intestacy or otherwise. Certain settlements will satisfy the qualifications where property held in trust passes to a lineal descendant. The beneficiary must be beneficially entitled to the gift. This also applies if the settled property is held for the lineal descendant on disabled person's trusts or bereaved minor trusts.
What effect will this have on other types of settlements?
Property held within a discretionary settlement will not qualify even if all the beneficiaries are lineal descendants. No one person is beneficially entitled. Neither will a settlement set up by a grandparent conditional upon reaching 21 or a typical substitution gift to the children of a deceased child with the same condition. These gifts fall into the relevant property regime with the resulting tax implications. However if appropriate advice is sought such settlements may be able to qualify. Appointments can be made from a discretionary settlement within 2 years of death to lineal descendants (IHTA 1984 s144), through the use of post death variations (s142) and the use of the PRs statutory power of advancement under Trustee Act s32 in the event of minor grandchildren. Most settlements are flexible and the Trustees can use their powers to modify and enable the beneficiary to take absolutely.
Lifetime transfers of the residence will not qualify unless the transfer falls within the complex downsizing provisions or where there has been a gift to a lineal descendant and the reservation of benefit rules apply. The gift will of the property will be chargeable as a failed GROB but will attract the Residential Nil Rate Band.
Downsizing legislation has been included to enable those who have downsized or sold their homes after 8 July 2015, perhaps to move into residential care, to claim the Residential Nil Rate Band. The provisions will apply if the estate comprises a residence or assets to the equivalent sale value at death. A proportion of the available Residential Nil Rate Band will be carried forward. It must be a "person" disposing of the residence in such cases, not a trustee. This will catch out those settlements where the residence is sold by trustees if the life tenant moves into residential care. The downsizing provisions will not apply.
The value of an estate is calculated as assets less liabilities and ignores reliefs and exemptions. Charges/debts against the residence will reduce the value of the property thereby potentially wasting the available Residential Nil Rate Band. The unused Residential Nil Rate Band of a person who has died before 6 April 2017 can be carried forward limited to £100,000. A taper relief applies to estates valued in excess of £2 million. Estates at this value or combined estates of husband and wife should take estate planning advice to avoid losing the full Residential Nil Rate Band. In calculating the value of the Residential Nil Rate Band potentially exempt transfers are ignored. Where combined estates exceed the £2 million limit death bed planning may be appropriate.
At first sight the Residential Nil Rate Band may appear quite straightforward. However the practicalities may not be so and time will tell. At Clapham & Collinge we would recommend that advice be taken as to the effect this may have upon current wills, for anyone who has or is considering disposing of their property, where aggregate estates are in excess of £2 million and where properties are charged with debt.
To find out more or to discuss your individual requirements in further detail, our specialist Wills, Trusts and Probate solicitors will be delighted to help. Contact us today on
