Residence Nil Rate Band – does your Will disqualify you from benefiting?

residence nil rate band accountant York Leeds

The new Inheritance Tax Residence Nil Rate Band (RNRB) comes into effect next month, but it has become apparent that many families may inadvertently miss out on this new relief.

The new RNRB applies where the main residence is passed on death to ‘direct descendants’ (i.e. children and grandchildren). It will be transferable between spouses and Civil Partners on death (as with the standard Nil Rate Band), with the unused percentage of the RNRB from the estate of the first deceased being claimed on the second death.

The RNRB is being phased in from April over a four year period, starting at £100,000 in April 2017 and increasing by £25,000 each year to reach £175,000 by April 2020. Once fully in place, the RNRB – when coupled together with the Nil Rate Band of £325,000 – will give individuals relief from Inheritance Tax on the first £500,000 of their estate, or £1m for married couples or Civil Partners (potentially saving an additional £140,000 tax).

Where the value of the estate exceeds £2m, the RNRB will be tapered by £1 for every £2 the net estate exceeds the £2m, meaning that is will not benefit estates worth more than £2.35m (from 2020/21 when the full RNRB kicks in).

However, an important exclusion to the RNRB is where the main residence is placed into a discretionary will trust for the benefit of the children or grandchildren. Please note that transferring the main residence into a trust other than a Discretionary Trust (e.g. Interest in Possession, Bereaved Minor, 18 – 25 Trust and Disabled Persons’ Trust) will still qualify for the RNRB.

Creating a Nil Rate Band clause was common wills planning for spouses before the transferable Nil Rate Band was introduced in October 2007. Such clauses remain relevant in certain cases, as they allow greater control over what happens to assets on death, and are useful where there are children from more than one marriage, for example.

The trust itself does not come into existence until it is triggered on the death of the first spouse, so there is nothing to unwind – but the order to create the trust needs to be removed. All is not necessarily lost if death occurs with the clause in the will as the Trustees can decide to wind up the trust and pass the house down to qualifying beneficiaries. If this is done within two years of death it is deemed to have been distributed from the estate and the RNRB will be preserved. However, it is better not to have to rely on the discretion of the Trustees but to get the will right.

Under certain circumstances it might actually be better not to update the will but to leave the trust provisions in place and leave it to the discretion of the Trustees to appoint out within two years. For example if a beneficiary is going through a divorce or bankruptcy you don’t want to give them the asset direct as it then may be lost. It may then be better to pay the tax rather than risk losing the asset.

A recent Telegraph article estimated that more than 100,000 families may lose out on the new RNRB because their wills still contain these provisions.

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