NOTE: This article was published in February 2017 and reflects the law as it stands on the date of publication and not at any later date.

Residential Nil Rate Band

• Additional nil rate band
  • Transfers on death on or after 6 April 2017
  • £100,000 (2017/18) rising to £175,000 (2020/21)
• Brought-forward allowance
  • up to 100% of RNRB (max. £175,000 in 2020/21)
  • on death of surviving spouse or CP on or after 6 April 2017
  • if and to extent that RNRB unused on first death
• Estate before death must include an interest in residential property
  • “closely inherited”
  • by lineal descendants
• Downsizing addition
  • disposals of residence on or after 8 July 2015
  • less valuable, or no, residence, owned at date of death

Limitations

• RNRB tapered if value of D’s estate more than £2m
  • £1 for every £2 above £2m estate
  • value of IHT estate (including ROB property)
  • less liabilities, disregarding exemptions and reliefs
• RNRB nil if estate exceeds £2.35m in 2020/21
  • or £2.7m if brought-forward allowance fully available
• Brought-forward allowance tapered
  • if estate of predeceasing spouse more than £2m
  • nil if equals or exceeds £2.2m
  • no use to anyone other than spouses or CPs
• RNRB cannot exceed value of QRI that closely inherited
  • net of liabilities, reduced by reliefs such as APR
  • subject to downsizing relief

QRI Inherited

• Estate on death must include a qualifying residential interest (“QRI”)
  • interest in dwelling house
  • which has been person’s residence
  • when person’s estate included that, or any other, interest in dwelling-house
• Inherited by B
  • will, intestacy or survivorship
  • B has an IPDI/DPI
  • B a child of deceased – BMT or 18-25 trust
  • gift to B with reservation of benefit
• D had an IIP on death
  • B becomes absolutely entitled on D’s death
  • not subject to power of appointment

Closely Inherited

• QRI closely inherited
  • if inherited by lineal descendant(s)
  • children, grandchildren etc
  • step-child treated as a child
  • adopted child treated as child of adoptive and natural parents
• Spouse of lineal descendant
  • widow(er) or surviving CP who has not remarried
• Not if gift to discretionary trust
  • IHTA 1984, s. 144 appointment within 2 years of death
• Deed of Variation

Will Drafting

• If no surviving spouse, leave QRI, or residue including QRI
  • to lineal descendants absolutely, or on IPDI trusts
  • to children on BMT or 18-25 trusts
• No RNRB
  • if gift to discretionary trust (unless appoint to, or on IPDI trusts for, lineal descendants within 2 years of death)
  • gift to a sibling or collateral relative, absolutely or on IPDI trusts
  • gift on trust for grandchildren at 18 or 25, e.g. if parent predeceases testator (but can appoint absolutely within 2 years of death)
• Leave QRI or residue including QRI to surviving spouse absolutely or on IPDI trusts
  • surviving spouse leaves QRI to lineal descendants (as above)
  • claim for brought-forward allowance on second death
• Spouses and CPs leave assets away from survivor to keep survivor’s estate below £2m
  • Leave ½ share in residence worth £500,000 on IPDI trusts for children on first death
  • if gift of ½ share to surviving spouse would mean that survivor’s estate would be worth at least £2.7m (RNRB, brought-forward allowance tapered to nil)
  • value of ½ share within testator’s NRB and RNRB (£325,000 + £175,000 in 2020-21) on first death
• NRB legacy to discretionary trust on first death
  • if keeps value of survivor’s estate below £2m
  • NRB legacy not a gift of a QRI to lineal descendants
  • brought-forward allowance available on death of surviving spouse
• Specific gift of share in home equal to value of QRI
  • to lineal descendant
    • on IIP trusts
    • subject thereto to cohabitee/partner
  • residue of estate including surplus QRI to partner
  • RNRB available for benefit of partner
  • terminate IIP in favour of unmarried partner
    • PET
    • uses up part of lineal descendant’s NRB

Planning

• Lifetime gifts to keep estate below £2m
  • failed PETs
  • deathbed gifts
  • if reservation of benefit, value of gift included in estate
  • CGT charge (no hold over relief)
• Lifetime gift of QRI to lineal descendant with subsequent ROB
  • where estate, including gifted QRI, below £2-2.35m
  • if gift likely to be failed PET (no RNRB available)
  • RNRB if donor reserves benefit (QRI inherited by lineal descendant)
  • IHT estate same if ROB as if failed PET
• Ensure that own QRI on death, or owned QRI qualifying for downsizing relief
  • worth £175,000, or £350,000 if brought-forward allowance
  • acquire QRI, upsize, or discharge secured debt over residence

Downsizing

• RNRB only available if QRI in estate on death
• Downsizing addition may be claimed where:
  • disposal of QRI on or after 8 July 2015
  • including termination of qualifying IIP
  • death on or after 6 April 2017
  • and maximum RNRB cannot be claimed on death because:
    • less valuable residence owned at death (IHTA 1984, s. 8FA)
    • or no residence owned at death (IHTA 1984, s. 8FB)
• Addition may be claimed equal to the “lost relievable amount”
  • value of lost RNRB as a result of disposal of QRI
  • limited to value of other assets, or proportion of, the remainder of assets which closely inherited
  • relief tapered where estate exceeds £2m

Lower value QRI owned at death: Contitions

1. Estate includes QRI, but RNRB less than full amount, because QRI which is closely inherited worth less than RNRB
2. Chargeable transfer on death attributable in part to property other than QRI
3. D previously owned another residence which would have qualified for the RNRB, disposed of after 7 July 2015
4. Value of former residence (at time of disposal) greater than value of residence on death
5. Some part of property in estate on death (apart from residence) closely inherited
6. A claim is made for the downsizing addition within 2 years of end of month of death

Addition equal to such part of the RNRB which does not apply, due to the downsize to the lower value QRI, limited to the value, or proportion, of the remainder which is closely inherited

No QRI owned on death: Conditions

1. Estate on death does not include QRI
2. Chargeable transfer on death greater than nil
3. D had a QRI, disposed of after 7 July 2015
4. Some of the property comprised in estate closely inherited
5. A claim is made for the downsizing addition within 2 years of end of month of death

Addition is amount of RNRB which could have been claimed had former QRI not been disposed of, limited by reference to value, or proportion, of the estate which is closely inherited.

Example

Peter (widower) sold his home in June 2018 for £240,000, and dies in 2020/21 with interest in property worth £105,000

1. Work out max RNRB on disposal: £125,000 + £175,000 brought-forward allowance (at date of death) = £300,000
2. Divide value of home when sold (£240,000) by value at Step 1 (£300,000) as a percentage = 80%.
3. Divide value of QRI on death (£105,000) by value of RNRB on death including brought-forward allowance (£350,000) as a percentage = 30%
4. Deduct % at Step 3 (30%) from % at Step 2 (80%) = 50%.
5. Multiply % at Step 4 by total RNRB on death to calculate lost relievable amount: 50% x £350,000 = £175,000 (provided that at least that amount is closely inherited)

Wills and Planning

• NRB gift of interest in residence equal to RNRB
  • plus downsizing addition
  • or of downsizing addition (if no interest at death)
  • to lineal descendants
    • absolutely
    • or on IPDI trusts
  • direction to PRs to make claim
• Sale of house and gift of sale proceeds
• PET
• Downsizing relief applies
  • but not if ROB

DOTAS and IHT

• Extension of DOTAS to IHT on 6 April 2011
• Arrangements creating relevant property trusts avoiding an entry charge
  • excluding arrangements which were first made available for implementation before 6 April 2011
• 2014 Consultation Document
• Revised draft regulations on 20 April 2016 as part of Strengthening the Tax Avoidance Disclosure Regimes for Indirect Taxes and Inheritance Tax
• Confidentiality and premium fee hallmarks from 23 Feb 2016
• Main purpose of arrangements to obtain a tax advantage
• Arrangements contrived or abnormal
• No grandfathering

Additional Rate of SDLT

• Surcharge of 3% since 1 April 2016
  • 15% on purchases above £1.5m
• Acquisition of “additional” dwellings
  • buy-to-lets or second homes
• Purchase of major interest
  • freehold or leasehold of 7 years or more
  • in residential property
• A. Chargeable consideration of more than £40,000
• B. Dwelling not subject to lease with more than 21 years to run
• C. Purchaser ends up with major interest in another dwelling
  • worth more than £40,000
  • not subject to a lease with more than 21 years to run
• D. The purchased dwelling does not replace purchaser’s main residence

Trusts and Inheritance

• In case of company only Conditions A and B
• Bare trust
  • B treated as making purchase
  • unless minor – interest treated as belonging to parent
• Life interest trust for B
  • B is treated as making purchase
  • additional rate unless B does not own other residential property
• Other trusts
  • additional rate if Conditions A and B apply
• An inherited property will be ignored for purposes of Condition C
  • if individual inherits less than 50% share in property
  • within 3 years prior to purchase of new dwelling

Non-Doms

• UK residential property held
  • through an intermediary such as offshore trust holding shares in non-resident company
  • owning a UK property
  • will no longer be excluded property from 6 April 2017
• Individuals resident in UK for at least 15 out of 20 tax years
  • deemed domiciled in UK for all tax purposes in 16th year
  • subject to tax on arising basis on worldwide income and gains
  • change to 17 out of 20 year rule for IHT
• Returning UK doms