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Glasgow
+44 (0)141 221 2984

Edinburgh
+44 (0)131 225 6366

Stirling
+44 (0)1786 451745

Dumbarton
+44 (0)1389 765238

Hamilton
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French Duncan

Q & A with John Cairns - effect of Residence Nil Rate Band

02 August 2017

French Duncan Tax Partner, John Cairns, answers a reader's query on the Residence Nil Rate Band, as published in the ICAS Technical Bulletin:

 

Readers Query:

I have a client who is concerned about a large part of the estate of his wife or his, and in particular the matrimonial home, having to be realised in the event of one of them having to go in to a nursing home.  His lawyer has suggested that their wills could be amended to include a provision that on the first death, the half share of the matrimonial home belonging to the deceased house should pass into a trust for the benefit of the surviving spouse and children.  This seems to be a similar idea to how wills used to be written prior to the transferrable nil rate band.

How does this impact on the residence nil rate band that is already £100,000 per spouse and by 6 April 2020 will be £175,000.

 

Answer:

As the querist notes, within three years, a married couple could have the benefit of £1 million of nil rate bands and for many individuals with moderate estates, inheritance tax is not an issue but the possibility of a spouse having to live in a care home for an extended period at some considerable cost to their estate, is of much greater concern.

If the wills of a married couple, provide that on the first death, all assets pass to the surviving spouse, then on the second death, two nil rate bands of £325,000 each will be available unless there have been lifetime gifts within the previous seven years and two residence nil rate bands will also be available provided that the house passes on the second death to lineal descendants.

HMRC produce a very good guidance note which can be found at:

https://www.gov.uk/government/case-studies/inheritance-tax-residence-nil-rate-band-case-studies

The residence nil rate band is not available in respect of lifetime gifts of a house.  The type of trust will also have a bearing on matters.

If, on the first death, the half share of the house is transferred to an interest in possession Trust this will be an immediate post death interest. The surviving spouse has the life rent of the property, which passes to the children on the second death.  The transfer of the half share into the trust is covered by the spouse exemption.  On the death of the surviving spouse, the value of the half share held in trust is added to the estate of the second spouse, and inheritance tax is calculated on the total. 

On the second death the following nil rate bands will be available:

-       The £325,000 nil rate band of the second spouse to die,

-       A further £325,000 nil rate band will be transferrable from the first spouse to die assuming it has not been used against any lifetime gifts in the seven years to the date of death or under the terms of the will of that spouse,

-       The residence nil rate band of the second spouse provided that their interest in the house passes to a lineal descendant,

-       A transferrable residence nil rate band of the first spouse to die. 

 

The residence nil rate bands will be available against both the interest in the house belonging to the second spouse to die and also the value of the half share owned by the trust, provided that the beneficiaries are lineal descendants.

The HMRC guidance referred to above, contains the following example:

Case study 8: how to apply the RNRB when a home is put into a trust.

-       Mr H died in the tax year 2017 to 2018. He left a house valued at £350,000 to his wife in a trust for her benefit whilst she’s alive. 

-       His will directed that the house will go to their children on his wife’s death. 

-       Mrs H dies in tax year 2020 to 2021.

-       The house, then worth £400,000, passes to the children when she dies.

-       A claim is made to transfer any unused RNRB from Mr H’s estate. RNRB for Mr H’s estate is nil because he left the house to his wife. RNRB available for transfer is 100% because none’s been used.

-       You work out the RNRB available on Mrs H’s estate as follows:

 

Mrs H’s own RNRB

£175,000 (maximum RNRB in tax year 2020 to 2021)

plus transferred RNRB

£175,000 (100% x £175,000)

maximum RNRB for Mrs H’s estate

£350,000

 

As the home passing to Mrs H’s children is worth more than the maximum available RNRB of £350,000, Mrs H’s estate qualifies for the full £350,000 RNRB.

If the half share of the house passes to a discretionary trust on the first death then this will utilise at least part of the £325,000 nil rate band of the spouse to die.  As the half share will not be passing to a lineal descendant, the residence nil rate band will not be available at this stage.  It may still be worth considering the use of a discretionary trust if flexibility is required as to the destination of trust assets or if it is felt that inheritance tax may be an issue on the second death.