It is fair to say a simple concept has turned out to be a complex reality, which raises a number of planning questions and concerns for advisers and clients. The current level of Nil Rate Band (NRB), set at £325,000 from April 2009, has been frozen at that level ever since and is due to stay there until April 2021. Some 12 years of a frozen NRB and increasing property prices, even with the new RNRB (Residence Nil-Rate Band), means many people will have an ever-increasing liability to IHT.
With the introduction of the RNRB, potential IHT liabilities will have to be recalculated for all clients that are affected. Because the new RNRB is tapered away by £1 for every £2 if the estate is valued at £2 million or above, this can create a tax trap where the effective rate of tax is 60%. So, planning to restrict growth above this level can be effective.
Failed potentially exempt transfers or chargeable lifetime transfers do not count towards the estate on death for the purposes of the RNRB so can be used right up to the point of death.
For those who will not qualify, or where the estate is above the limit, which will be individuals with ‘net’ estates in excess of £2.2 million or last survivors with estates in excess of £2.4 million in 2017/18, rising to £2.7 million by 2020, they will need to consider alternative strategies to mitigate the IHT liability.
It is important to consider whether a client has direct descendants to whom they are able or want to leave a property. While not advocating that clients start a family later in life, the new RNRB does seem to penalise couples who have made a lifestyle choice not to have children or have no direct descendants.
For co-habiting couples with children, common planning often involves leaving a share of a property on first death to utilise a NRB via a discretionary trust. This will not work in respect of the RNRB. However, there are a couple of options: they may either leave the estate directly to their children via an absolute or qualifying interest in possession (IIP) trust or even consider getting married so the estate automatically transfers.
Wills already set up for married couples will need to be reviewed as many properties are owned as tenants in common and utilise a discretionary or non-qualifying IIP trust in a will. New planning will need to be undertaken to make sure couples qualify for the RNRB in the terms of the will.
Where there are two qualifying properties, the personal representatives have to decide which one to nominate as the qualifying one for RNRB. Plus, if the combined value of the property is under the two RNRBs, lifetime planning could be undertaken to leave one of the properties to children on first death to avoid one RNRB allowance being wasted.
Where a property is valued at less than the two RNRB allowances available to a couple, it may be worth considering ‘upsizing’. It seems bizarre to consider that an older couple may look to buy a larger property to make full use of all the available £1 million IHT allowance from 2020. However, this could save them a large sum of money.
Certain equity release schemes create a debt on the property and the RNRB is only available on the ‘net’ interest. Alternatively, a scheme where part of the property is sold to release funds could make use of the ‘downsizing’ provisions.
No doubt there will be more things to consider but, as ever, time will tell as we start to live with these complex changes. This is a subject advisers should continue monitoring.
If you feel overwhelmed by these new rules and regulations, please do not hesitate to get in touch to arrange an appointment with one of our advisers.