NOTE: This article was published in December 2018 and reflects the law as it stands on the date of publication and not at any later date.
The paper can be downloaded as a PDF here.
9.1. Gifts to reduce estate below £2m
Tapering will begin to reduce the RNRB in an estate worth more than £2m (see 4 above). Lifetime, and even deathbed, gifts could, therefore, be made to reduce the estate to or below £2m.
Constance is a widow who in 2020/21 is diagnosed with cancer and has a few months to live. She has an estate of £2.7m, and would on her death be entitled to a RNRB of £350,000, including a brought-forward allowance. She has adult children.
Constance could make gifts of £700,000 to her children absolutely. This would not reduce the aggregate of her IHT estate, since the £700,000 gift will form part of her cumulative total on death, being a failed PET. However, her estate would be entitled to a RNRB of £350,000 which would not otherwise be the case if she made no life.time gifts. Note that a donatio mortis causa involving delivery of the subject-matter of a gift, in contemplation of death, is only perfected on the donor’s death. It does not, therefore, reduce the value of the donor’s estate immediately before death for the purposes of IHT and will, therefore, be ineffective for these purposes.
Constance should, if possible, make gifts which do not give rise to a significant CGT liability. A gift of chargeable assets to her children will be at deemed market value (TCGA 1992, s. 17). The tax-free uplift on death will be lost by making a lifetime gift. Gifts of cash would be preferable, so long as chargeable assets do not have to be sold at a significant gain in order to realise the cash.
9.2. Lifetime gifts and married couples
Lifetime gifts should be considered in the case of married couples.
Jeffrey has an estate worth £2.2m, including a house worth £1m. He has recently married Jean, who is much younger than him. She has no interest in Jeffrey’s house, and no assets of her own. Jeffrey has children, as does Jean. Advice is sought in 2017/18 when Jeffrey’s residential enhancement is £100,000.
If Jeffrey died in 2017/18 leaving the whole of his estate to Jean absolutely or on IPDI trusts, the brought-forward allowance could not be claimed on Jean’s death, as the brought-forward allowance on Jean’s death would be tapered to nil (see 5.6 above). If Jeffrey made a gift in his Will to his children of a share in his house, equal to the RNRB, the RNRB would also be nil if Jeffrey died in 2017/18, due to tapering in the case of an estate exceeding £2m (see 4 above).
Jeffrey should consider making lifetime gifts sufficient to reduce his estate below £2m. He could:
(a) make lifetime gifts to his children absolutely (which would be PETs, but hold-over relief would not be available under TCGA 1992, s. 260(2)(a)));
(b) settle a sum, not exceeding his nil rate band, on discretionary trusts for his children and step-children and their children (in respect of which any gain could be held over so long as dependent children are excluded);
(c) make a lifetime gift to Jean absolutely; or
(d) settle a sum, not exceeding his nil rate band, on trust for Jean for life, remainder to his children.
A gift by one spouse to the other absolutely is exempt for IHT purposes. However, it would be at a no gain/no loss for CGT purposes. Care would need to be taken not to gift assets which are pregnant with gain, as the tax-free uplift on Jeffrey’s death will be lost. Care should also be taken to ensure that Jean’s estate is within the taper threshold on her death.
9.3. Gift of QRI
Jeffrey (see 9.2 above) could assign a share in his house, rather than other assets, to Jean (if he is prepared for her to have a share in her own right in the new matrimonial home). If, say, the share given to Jean were worth £350,000, this would be sufficient to reduce Jeffrey’s estate below £2m. Jean would also be entitled to the downsizing addition, if the home were sold after the gift to her, so long as her estate is worth less than the taper threshold on her death. She would have no such entitlement if the house were sold at a time when she had no interest therein.
9.4. Severance of joint tenancy
Commonly the matrimonial home is held by the spouses as equitable joint tenants. The whole beneficial interest will pass to the survivor absolutely. This may mean that the survivor’s estate exceeds £2m, and that the RNRB is subject to tapering. Unless the joint tenancy is severed (so that both spouses have 50% shares) it may not be possible to make a RNRB gift on the first death so as to keep the survivor’s estate within the taper threshold (see 8.11.5 above).
9.5. Farmhouses
A farmhouse or former farmhouse may not qualify for APR because it is no longer occupied for the purposes of agriculture, or is not of a character appropriate to the agricultural land. Even if it qualifies for APR, it will only be entitled to relief on its agricultural value, which may be 70% of its open market value.
The RNRB may, therefore, reduce IHT exposure in respect of the non-agricultural value so long as the farmhouse is closely inherited by direct descendants. It may, therefore, be desirable to review the Will to ensure that the farmhouse is closely inherited.
However, in many cases, the value of the farmer’s whole estate, including any agricultural property attracting APR (see 4.2 above) will exceed £2m, so that tapering applies to reduce or extinguish the RNRB. Therefore, consideration should be given to the farmer making lifetime gifts (perhaps of farmland attracting APR) to reduce the value of the farmer’s estate before death. If a lifetime gift were made to a non-settlor interested, relevant property, settlement, an election could be made to hold over the gain. A lifetime gift of farmland to the next generation would be attractive, if that farmland is not needed to support a claim to APR on the farmhouse.
9.6. Assuming a reservation of benefit
It may even be advantageous to reserve a benefit after a gift has been made.
In 2014 Sam gives his house to his daughter, Pixie, and did not reserve a benefit therein. He moved into rented accommodation. He is subsequently diagnosed with a fatal illness, and is unlikely to survive for 7 years from the date of his gift. The value of his estate, including his house which will form part of his cumulative total on death by reason of the failed PET, will exceed his SNRB and any TNRB, but will not exceed £2m.
The RNRB will not be available on Sam’s death, as the house will not be comprised in Sam’s estate, and so will not be closely inherited. Downsizing relief will not apply as Sam disposed of his house before 8 July 2015.
If, however, Sam resumed his former occupation of the house, thereby giving rise to a reservation of benefit, the house would be closely inherited (see 3.5 above). The RNRB would then be available. Sam’s estate will not disadvantaged by reason of the reservation of benefit, since the value of the house will in any event be aggregated with his estate on death by reason of the failed PET. The point is that the estate will have the benefit of the RNRB.
There would, however, be no point in assuming a reservation of benefit, if the effect of doing so were to increase the value of the taxable estate (including GWROB property) so that tapering reduces the RNRB to nil (see 4 above). Nor would there be any point if Sam retains another residence which is of sufficient value to make full use of the RNRB.
9.7. Downsizing and gift of surplus sale proceeds
A parent might well be advised to sell their home, and to downsize to a less valuable property, or even to move into rented accommodation, whilst making a gift of the whole or part of the surplus sale proceeds to their children.
Alexandra, a widow, sells her home in 2017/18 for £1m, and moves into a nursing home. She makes a gift of £500,000 to her two children. She survives for 7 years, and dies leaving the whole of her estate to her children absolutely. On her death her RNRB is £350,000.
The gift of £500,000 will be exempt if Alexandra survives for 7 years. Downsizing relief will apply in full on Alexandra’s death, as her estate will be closely inherited, provided that it is worth at least £350,000. Of course, there is a danger that, having regard to care home fees, her estate will be worth less than £350,000 by the date of her death, in which case downsizing relief may not be available in full.
9.8. Acquisition of QRI
There may be no present entitlement to the RNRB, due to the lack of a QRI, in which case it may be worth acquiring one.
Colin sold his flat before 8 July 2015, and is not, therefore, entitled to the downsizing addition. He is living in rented accommodation, or in a flat worth less than the RNRB, including a brought-forward allowance from the death of his late wife. His estate is worth less than £2m, and he has children and grandchildren.
Colin could buy a property worth at least £350,000, and move into the property at least for a period. He does not need to reside there at the date of his death, so long as he then owns it, and has resided there when he owned an interest therein. Alternatively, he could sell the property before his death, and downsize to a lesser value property, or to none at all.
Colin should leave the property (by way of a specific or residuary gift) or other as.sets (if he has downsized) to his children absolutely or on IPDI trusts. His estate should then be entitled to the full RNRB.
9.9. Move into rented property
An individual may own an investment property, in which they have never resided, and also have no other QRI. Consideration should be given to taking up residence at some point during the period of ownership.
Francois, who is non-domiciled in the UK, has purchased a flat in London worth £1.5m, as an investment. He has no other residence, or assets, in the UK.
Francois might consider residing in the flat for a period before renting it, or during rental voids, so that the residence requirement is satisfied. If, say, Francois becomes ill, and wishes to receive medical treatment in London, he could move into the flat, if he is never resided there before. If he retains the flat until his death, or sells it and downsizes, the RNRB should be available, so long as the flat is closely inherited.
9.10. Mortgages
One way of increasing the value of a QRI may be to discharge a mortgage.
Anita owns a property worth £500,000, subject to a mortgage of £250,000, so that the net value of her QRI is £250,000. She has other assets of £1m. If she died in 2020/21 her estate would be entitled to a RNRB of £350,000. She has children.
Anita should, if possible, pay £100,000 to reduce the mortgage to £150,000, thereby increasing the equity to £350,000.
Anita owns an unmortgaged property worth £200,000, in addition to her main property (net equity of £250,000).
Anita could switch £100,000 of the mortgage to her unmortgaged property, so that the net value of her main property is increased to £350,000.
Generally, indebtedness should, if possible, not be secured against the residence or most valuable residence, rather than against other assets, if the effect is to reduce the equity below the RNRB.