Further to the Article written by Alex Streeter on 12 September 2019 in relation to the Residence Nil Rate Band (“RNRB”), it is important that clients reconsider their Wills to ensure that they are drafted in such a way to ensure that the RNRB is available. It is common for clients to have utilised trust structures in their Wills to, amongst other things, protect against the payment of care home fees, but in certain circumstances these Wills will prevent the RNRB being available in full.

Scenario

A common scenario arises whereby clients have an asset base such that the RNRB is needed to avoid inheritance tax “IHT” (i.e. they have assets above £650,000 - twice the Nil Rate Band for a married couple), but nevertheless the clients want to try to introduce some form of care home fee planning, or a life interest trust on the first death to protect against the second marriage of the survivor. Such structures are entirely appropriate and remain sound advice notwithstanding the imposition of the RNRB.

Take, for example, the situation where the clients have assets as follows:

Property: £350,000

Cash/other investments: £650,000

Total: £1m.

The clients want the survivor of them to benefit on the first death, but to protect against care home fees and to ensure that the 50% of the estate of the first to die is ring fenced from a second marriage of the surviving spouse. Hence the instructions given to their solicitor were (or are) to sever the joint tenancy of the family home and prepare flexible life interest trusts. On the second death of the couple, there will be a discretionary trust for the benefit of the children – who are currently minors.

IHT - a problem?

With basic wills, pursuant to which the estate passes to the spouse outright, with a gift over to children on the second death, the clients would have two Nil Rate Bands and two RNRBs, hence a total of £1m relief (by 06/04/2020). Hence there is no IHT liability.

However, with Wills drafted as the clients have requested, the IHT position is as follows (assuming an even split of the assets between the clients):

On the first death: £500,000 passes onto a life interest trust (no IHT is payable due to the spouse exemption).

On the second death, the survivor owns £500,000 outright (including a £175,000 property interest). The life interest trust owns £500,000 (including a £175,000 property interest). However, only £175,000 RNRB is available – assuming the 50% of the property in the survivor’s estate is distributed to a direct descendant within two years of the death of the survivor (such that section 144 of the Inheritance Tax Act 1984 applies). Section 144 operates such that, where property is settled by Will, and is distributed to a beneficiary within two years of death, there is no relevant property charge and the Will is deemed to have effect as if it had directed the property as distributed (i.e. there is a “reading back” to the date of death). Note that this section only applies provided the distribution from the Will trust applies prior to an immediate post death interest (i.e. a life interest created by Will post 22/03/2006) arising in the settled property.

The 50% of the property in the life interest trust does not pass to a direct descendant - it passes to a discretionary trust, and section 144 does not apply (as an IPDI has arisen in the property). Hence the RNRB is not available on the 50% of the property owned by the first of the clients to die.

Accordingly, the tax position is:
£1m taxable estate

(£650,000 NRB x2)

(£175,000 RNRB)

Taxable estate: £175,000 x 40% = £70,000 IHT.

Solutions?

It is possible for the Letter of Wishes of the first to die to state that, after the first death, further IHT advice should be taken which might involve distributing the property interest from the interest in possession trust to the spouse such that two RNRBs will then be available on the second death.

However, this will not be possible in circumstances where the clients die close to one another: either in an accident or swiftly after one another for another reason. Take for example the situation where the clients are in a car accident: one dies at the scene, and the other dies shortly after in the ambulance/at hospital. In those circumstances, part of the RNRB is lost and the IHT falls due.

Hence, a safer solution would be to include a survivorship provision in the Wills: (i.e. the survivor must survive for at least, say, 28 days for the life interest for the survivor to come into effect. This leaves a window of opportunity for the residence to be distributed out of trust to save the RNRB.

Commorientes

There is a further consideration here: the obscure rule of commorientes (which was relevant in the recent case of John and Marjorie Scarle.

Whilst often disregarded, the RNRB trap is one of the situations where commorientes should be considered: the survivorship provision in the Wills should be dis-applied where the clients die together (i.e. where it cannot be determined who survived the other). This may achieve (via commorientes) an even more favourable IHT result than the Will draftsman had intended.

We would encourage all clients to take this opportunity to revisit their Wills, particularly where the combined value of their taxable estates is above £325,000 per individual (£650,000 for a couple), such that the RNRB may be utilised. Do please contact us if you would like to arrange an initial free consultation.