RNRB & Discretionary trusts
A year on from the implementation of the Residential Nil Rate Band (RNRB) is the perfect time to revisit this rather complex inheritance tax relief.
Coffin Mew LLP Solicitors Sarah Roberts and Stacy Keech both wrote excellent explanatory articles about the main provisions. I recommend you take the time to read them, but I will summarise the salient points below.
For deaths that occurred on or after 6th April 2017 a new inheritance tax relief, the RNRB became available. In order to qualify you must have owned a property on your death and it must be ‘closely inherited’ e.g. your children or grandchildren inherit the property. The definition of children ranges from biological and adopted children to step and foster children.
When the allowance began, it was worth £100,000 to each tax paying estate and another £100,000 was available should your spouse or civil partner have died before you – known as the Transferable Residential Nil Rate Band (TRNRB). On the 6th April 2018 this will increase by an additional £25,000 per person. This increase will continue until the 2020/2021 tax year until the maximum available relief is £175,000 per person or £350,000 between married couples.
A major catch to the RNRB is that there is a requirement that the beneficiaries receive the property as an absolute gift. If it is tied up in a trust it is received by the trustees in the first instance, even if they then pass the property on to children of the person who has died. If the tax exemptions provided by the RNRB and TRNRB are lost this could result in an additional inheritance tax due from the estate of £100,000 for a couple or £50,000 for a single person. As a percentage this would equate to 40% of what would have been the RNRB and TRNRB available otherwise.
A life interest trust is protected under the tax regime as the trust assets are treated for tax purposes as if they are owned by the life tenant. Most other trusts are not.
One common trust found in wills is a discretionary trust. It has been used in the past to save the TRNRB of one person where it might be lost due to spousal exemption being the tax relief available. Now it is possible for a surviving spouse’s estate to claim the unused TRNRB of the first to die and in effect double the inheritance tax relief available.
However, if wills are not updated, and the property falls into the discretionary trust, this is where the tax relief is lost. It is possible to save the RNRB and TRNRB by appointment the property out to surviving spouse or children with two years of the date of death. If you are an executor in such a situation, you should consider dealing with this as swiftly as possible.