Estate Planning Guide

13 12 THE ESTATE PLANNING LANDSCAPE THE ESTATE PLANNING LANDSCAPE between spouses (those who are married or in a civil partnership). In addition: • The RNRB exempts a portion of the value of a home’s value from IHT, in the estates of people who die after 6 April 2017 • In the 2018/19 tax year, the portion is £125,000. This will increase by £25,000 every April until 2020 • By 2020 it will reach £175,000 per person (and therefore £350,000 per couple) • From April 2021, it will increase in line with CPI inflation every year • The deceased must leave a residence to their direct descendant so that it is “closely inherited” (defined to include children, grandchildren, step-children, adopted children, foster children and the spouses of all this class of person). Adding this to the couple’s NRB, will equal £1 million per couple by the 2020/21 tax year • The RNRB will be reduced by a rate of £1 for every £2 the value of the estate exceeds £2million • Unused RNRB can be passed from one spouse or civil partner to the other. It is the unused percentage and not the unused amount that is transferred. DOWNSIZING The scope of the RNRB has been supplemented by provisions contained in the Finance Act 2016 which provides that when someone has sold, given away or downsized to a less valuable home before they die, their estate may be able to get an extra IHT threshold. This is known as a downsizing addition. Where the deceased has died on or after 6 April 2017, and downsized to a less valuable home/ sold their residence (maybe to move into a residential home or to live with a relative) on or after 8 July 2015 and left assets of an equivalent value to direct descendants, on or after 8 July 2015 the RNRB band will be preserved and referred to as the ’additional RNRB’. This cannot exceed the RNRB for the tax year in which the death occurred, although there is no limit on the period between the downsizing and the date of death or the number of times between 8 July 2015 and the date of death that a person downsizes. For the purposes of the additional RNRB, the value of the property is the net value after deducting any mortgage or other charge secured on it. A part or share of the property may be disposed of and the entitlement to the additional RNRB retained and if the property is given away, the additional RNRB is available if assets of an equivalent value are left to direct descendants. It is also only applicable to one move, sale or other disposal of a former home, however, where there are multiple homes, moves or sales, the property which qualifies for the relief can be chosen by the estate executor and, as with the NRB, any unused RNRB can be passed onto the surviving spouse or civil partner. The estate’s personal representative must make a claim for the downsizing addition within two years of the end of the month that the person dies. The limitations on the use of the RNRB, which include that it is not available to those who don’t own a property which they have lived in, those beneficiaries who are not lineal descendants, or those who disposed of their property before 8 July 2015, will leave high numbers ineligible to apply it to their estates. As a result, other options may still be required. RNRB AND TRUSTS A home is included in a person’s estate if it’s either held in: • a bare trust, or • an interest in possession trust so that they had the right to use or occupy the property. This can occur when a person is given a right to live in their family home following the death of their spouse. The home is held in trust for the lifetime of the beneficiary. When the beneficiary dies, the estate will be eligible for the additional threshold as long as their direct descendants then inherit their home. If the home is held in a discretionary trust, it wouldn’t normally be included in the beneficiary’s estate. When the beneficiary dies, their estate won’t be eligible for the additional threshold even if the home goes to the beneficiary’s direct descendants, or if they’re entitled to the assets in the trust, unless, for example, the trust has been set up for: • a disabled beneficiary • orphaned children under 18, or • any children under 25 2017-18 2018-19 2019-20 2020-21 £100,000 £125,000 £150,000 £175,000 RESIDENCE NIL RATE BAND Updated HMRC Guidance with examples of downsizing scenarios and calculation of the applicable RNRB can be found at: https://www.gov.uk/guidance/how-downsizing-selling-or-gifting-a-home-affects-the-additional-inheritance-tax-threshold The RNRB is only applicable if the direct descendants become entitled to the home when the person dies. The RNRB will be lost if the property is transferred into a discretionary trust but some trusts for the benefit of children or grandchildren will not result in loss of the allowance. If the trust gives a child or grandchild an absolute interest in possession in the home the RNRB can still be claimed. Other forms of trust such as Bereaved Minor, 18-25 trust and Disabled Persons Trusts will also retain it. It may be possible for discretionary trustees to reclaim the allowance by making a RNRB gift post-death. As long as a discretionary trust is unwound within two years of death, by the trustees appointing the trust assets to a direct descendant absolutely, this will be treated for IHT purposes as if the assets had simply been left outright. Alternatively, the trustees can confer an interest in possession on the descendant within two years of the person’s death, which will be treated for IHT purposes as if the Will had conferred an Immediate Post Death Interest. Estate Value Value of RNRB after taper single joint £2,000,000 £125,000 £250,000 £2,050,000 £100,000 £225,000 £2,100,000 £75,000 £200,000 £2,150,000 £50,000 £175,000 £2,200,000 £25,000 £150,000 £2,250,000 £0 £125,000 £2,300,000 £0 £100,000 £2,350,000 £0 £75,000 £2,400,000 £0 £50,000 £2,450,000 £0 £25,000 £2,500,000 £0 £0 RNRB Taper Relief Based on 2018/19 RNRB Allowance