How To Handle The Residence Nil Rate Band

The residence nil rate band (RNRB) came into force on 6 April 2017. The RNRB is available when a person who dies on or after that date holds a 'qualifying residential interest' (QRI) at their death, which is 'closely inherited' by a 'lineal descendant'. A QRI is an interest in a dwelling house which has, at some time during the period of ownership, been the residence of the deceased. Any unused portion of the RNRB is transferable to the surviving spouse in the same way as the NRB. There are taper withdrawal and downsizing provisions to consider.

Introduction

6 April 2017 welcomed the residence nil rate band, which aims to achieve the £1m inheritance tax (IHT) allowance (the amount of the estate which is taxed at 0%) for married couples. The first provisions were set out in the F(No. 2)A 2015, which inserted ss S8D-S8M into IHTA 1984. The Finance Act 2016 made further provisions in relation to downsizing.

The total IHT allowance of £1m is achieved through a combination of:

the nil rate band (NRB), taxed at £325,000 until April 2021 the transferable NRB between spouses/civil partners, and the residence nil rate band (RNRB) The basics

The RNRB is available when a person who dies on or after 6 April 2017 holds a 'qualifying residential interest' (QRI) at their death, which is 'closely inherited' by a 'lineal descendant'.

The RNRB is being phased in over a four year period so that the available RNRB will be:

£100,000 in 2017/18 £125,000 in 2018/19 £150, 000 in 2019/20 £175,000 in 2020/21 Following this, the RNRB will rise in line with the consumer price index. The RNRB is capped at the value of the deceased's residential interest.

What constitutes a qualifying residential interest?

A QRI is an interest in a dwelling house (including a garden or grounds of any size, but not including woodland attracting relief from IHT) which has, at some time during the period of ownership, been the residence of the deceased (thus precluding buy to let properties). It need not have been the deceased's 'main' residence, nor is there a requirement that the deceased was resident for the entire period of ownership (IHTA 1984 s 8H).

Whether the property is a 'residence' will presumably be decided on the basis of existing case law, considering 'main' residence relief for CGT (see Goodwin v Curtis [1998] STC 475). A recent CGT case, Dutton-Forshaw [2015] UKFTT 478, set out that there needs to be an element of permanence and continuity of occupation, but the level required will undoubtedly depend on other influencing factors. The property need not be situated in the UK.

A residence, or interest in a residence, left to immediate post-death interest trusts, disabled person's trusts (IHTA 1984 s 89) or bereaved minor trusts (IHTA 1984 s 71A or s 71D), will be treated as inherited. A discretionary trust will not qualify even if all of the potential discretionary beneficiaries are lineal descendants. Issues surrounding the use of non-qualifying trusts are possibly the most important practical consideration for day to day estate planning.

A relevant property trust will not qualify but it would be possible to make an appointment from the trust within two years of death for this appointment to be read back into the will for IHT purposes (IHTA 1984 s 144). The appointment mechanism could be used to appoint a residence to a lineal descendant or to create a qualifying immediate post-death interest trust.

If the deceased owned more than one QRI in different dwellings, then the personal representatives of the deceased must nominate which property the RNRB will apply to.

Debt charged over the property is deducted for IHT purposes and will therefore reduce the property value (potentially reducing the available RNRB). Part of the estate planning process may involve...