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.
8.1. When RNRB gift not appropriate
In many cases, there will be no need for a specific gift of a QRI to direct descendants absolutely, or on IPDI trusts, with a view to making full use of the RNRB. This will be the case where:
(a) the value of the testator’s estate is so large (in 2020/21 above £2.7m if the brought-forward allowance applies, otherwise above £2.35m) that the RNRB would be tapered to nil;
(b) conversely, where the value of the chargeable estate, having regard to any exemptions, is so low that it is within the SNRB and TNRB;
(c) there are no direct descendants of the testator, or none whom the testator wishes to benefit; or
(d) the testator is married, in which case it will, subject to exceptions, normally be better to leave the estate to the surviving spouse absolutely or on IPDI trusts.
8.2. Gift attracting the RNRB
Where it is desired to make full use of the RNRB, the deceased (D) may make a gift of either:
(a) a QRI and/or any downsizing addition, limited to the RNRB (see 8.6. below); or
(b) of the full, or part of the, value of the testator’s QRI even if such value exceeds the RNRB (see 8.4. below) in such a way that the QRI is “closely inherited”.
This will be achieved where D leaves a QRI and/or any downsizing addition, limited to the RNRB or of a greater value, to one or more direct descendants by Will:
(a) absolutely;
(b) on IPDI trusts within IHTA 1984, s. 49A;
(c) on trusts in which there is a disabled person’s interest within IHTA 1984, s. 89B; or
(d) upon trust for D’s children at 18 on trusts for a bereaved minor within IHTA 1984, s. 71A, or at an age between 18 and 25 on an 18-25 trust within IHTA 1984, s. 71D.
8.3. RNRB not available
The RNRB will not, however, be available in respect of gifts of a QRI and/or of the downsizing addition:
(a) on discretionary trusts (unless an appointment is made to a direct descendant within 2 years of death, having retrospective effect under IHTA 1984, s. 144: see 8B below);
(b) to a spouse, sibling or collateral relative, absolutely or on trust;
(c) upon age-contingent trusts for children who have not attained the specified age on the death of the testator, unless the trust qualifies as an IPDI trust, a bereaved minor’s trust, an 18-25 trust, or on a disabled person’s trust; or
(d) upon age-contingent trusts for grandchildren who have not attained the specified age on the death of the testator, unless the trust qualifies as an IPDI or disabled person’s trust (albeit that an appointment can be made out of a relevant property trust to the grandchild absolutely or on IPDI trusts, within 2 years of death, having retrospective effect under IHTA 1984, s. 144).
Nor will the RNRB be available in respect of a pecuniary legacy (even if there is subsequently an appropriation of a QRI to satisfy that legacy). It is not, therefore, applicable to a nil rate band legacy of a sum of money.
8.4. Age-contingent gifts
Age-contingent gifts of a QRI to children of the testator should, if the benefit of the RNRB is desired, be contingent upon the child attaining the age of 18 or 25, and should qualify as a trust for a bereaved minor, or as an 18-25 trust (see 3.9.2. above).
Grandchildren, on the other hand, will not closely inherit if their entitlement to capital is contingent on attaining any age and they have failed to attain that age on the testator’s death. This will be of particular relevance to substitutionary gifts for grand.children, taking effect in the event that a child of the testator has predeceased the testator. The testator might, therefore, leave a QRI to his children in equal shares, provided that if any of his children predecease him, leaving children living at the date of death of the testator, such children, i.e. grandchildren, shall be absolutely entitled to their parent’s share in equal shares.
Alternatively, the share of a grandchild could be settled on IPDI trusts, excluding Trustee Act 1925, s. 31. That share can be appointed or advanced to the grandchild absolutely on attaining the age of 18, or even at a greater age, without any IHT charge (IHTA 1984, s. 53(2)).
8.5. Age-contingent gifts: consequences and solutions
It is not the end of the world if the testator’s QRI is left in such a way that the QRI is not closely inherited, e.g. by grandchildren.
First, some of the grandchildren may have attained the age of 21 on the death of the testator, in which case the shares of those grandchildren will be closely inherited. The value of those shares may equal or exceed the maximum RNRB, in which case the RNRB is available in full.
Second, a grandchild who has attained the age of 18 on the death of the testator will have a right to the income, by virtue of s. 31 of the Trustee Act 1925 (unless excluded). The grandchild’s right to the income will be an IPDI, with the result that their share will be closely inherited.
Third, if a grandchild is still a minor on the death of the testator, or there is power to accumulate income after the age of 18, a relevant property trust will arise. The trustees could, within 2 years of the testator’s death advance or appoint (if they have power to do so) the QRI to the grandchild absolutely, or on IPDI trusts. Unless excluded, the statutory power of advancement in s. 32 of the Trustee Act 1925 will en.able the trustees to appoint capital to a beneficiary with a contingent interest therein. Such an advance or appointment will be retrospective to the testator’s death (IHTA 1984, s. 144). However, it is a requirement of IHTA 1984, s. 144 that no interest in possession has arisen before the appointment or advance.
Fourth, it may be possible for the grandchildren to execute a Deed of Variation so that all the grandchildren are absolutely entitled to their shares, or have an IPDI therein, provided that all the grandchildren are over the age of 18, capable, and are the only persons interested in the property which is subject to the variation.
8.6. Gift of QRI not limited to RNRB
The testator may wish to make a gift of a QRI, or of residue including a QRI (see 8.7. below) to direct descendant(s) even though the value of the gift exceeds that which is sufficient to make full use of the RNRB.
Tania is unmarried or widowed, or she is married, in which case she may, of course, survive her spouse. She has adult children. She owns an interest in her home worth £700,000, and other assets of £500,000.
Tania could make a specific gift of all, or a large part of, her beneficial interest in her home, or of any property which is principal residence at the date of her death, to her children absolutely or on IPDI trusts. Alternatively, she could simply leave her residuary estate, or a share thereof which is more than sufficient to take full advantage of the RNRB, to her children absolutely, or on IPDI trusts. If a QRI is settled on IPDI trusts, then the remainder beneficiaries, on the death of the IPDI beneficiary, should be absolutely entitled, if the RNRB is to be available on that death (see 8A below in relation to an IPDI trust for a surviving spouse). The downsizing addition will be available if Tania has downsized before death.
Another option is for Tania to leave the whole of her residuary estate on discretionary trusts, subject to a letter of wishes, thereby giving maximum flexibility. The trustees can make appointments within 2 years of death which will be retrospective to death for IHT purposes (see 8B below).
8.7. Residuary gifts
A QRI can be closely inherited, even though it is comprised in the residuary estate, rather than being the subject of a specific gift so long as the residuary estate, or a share thereof, is closely inherited.
Pedro leaves his residuary estate, worth £1m, including a QRI, worth £500,000, as to a 2/5 share to his son, Francesco, and to his sister, Frederica, as to a 3/5 share. He dies in 2017/18 with a RNRB of £100,000.
IHTA 1984, s. 8E(1) provides, in effect, that the value of a QRI which is closely inherited is equal to the percentage share of the value transferred on death which is attributable to the QRI. As 2/5 of the residuary estate, including the QRI, is closely inherited by Francesco, then 2/5 of the value of the QRI will be treated as be.ing closely inherited. The value of the QRI which is closely inherited is, therefore, £200,000.
The RNRB will be available in full (£100,000) because the value transferred on death attributable to the QRI (NV/100) is £200,000, which is greater than the default allowance of £100,000 (IHTA 1984, s. 8E(3)). The RNRB is, therefore, £100,000, not 3/5 of £100,000.
If, however, the QRI were only worth £200,000, the value of the QRI which is closely inherited would be 2/5 of £200,000, i.e. £80,000. The available RNRB would be limited to £80,000, as that value is less than the default allowance of £100,000 (IHTA 1984, s. 8E(2)).
8.8. RNRB gift: form
Where it is desired to take advantage of the RNRB, the testator may want to limit the gift of a QRI to a share in their residence plus any downsizing addition, limited to the value of the RNRB, to direct descendants absolutely, or on IPDI trusts. This will make maximum use of the RNRB whilst making the lowest value gift to direct descendants which is consistent with that objective.
There are a number of possible ways of drafting such a gift. However, the general form is as follows:
(a) a gift of the whole or such share of any QRI of the testator as would entitle the estate to the maximum benefit of the RNRB; plus (in order to make use of any downsizing addition);
(b) a pecuniary legacy of such amount (if any) as is necessary to ensure that the estate obtains such maximum benefit if and to the extent that the value of the QRI is insufficient for that purpose; and
(c) with a direction to the Executors to make such claims and nominations to ensure that the estate obtains the maximum benefit of the RNRB (such as claims to the brought-forward allowance and to the downsizing addition, and where the testator had a QRI or QFRI in more than one dwelling-house, a nomination of one of those dwelling-houses pursuant to IHTA 1984, s. 8H).
The gift will, therefore, be of the testator’s QRI and a pecuniary legacy sufficient to utilise the testator’s RNRB, including any downsizing addition and brought-forward allowance.
The gift should be to direct descendants in such a way that it is closely inherited (see 8.2 above). This will be the case if the gifts are to direct descendants absolute.ly, or on IPDI trusts. However, another option is to make the gift to a 23-month discretionary trust with a view to appointing to direct descendants within the 23-month period, if so desired (see 8B below).
8.9. Interaction with nil rate band discretionary trusts
It may be desirable, on the death of a predeceasing spouse, to combine:
(a) a nil rate band legacy, i.e. of the maximum amount of cash which can be given without incurring any IHT on the testator’s death, to a discretionary trust for the benefit of the testator’s family, including the surviving spouse; and
(b) a gift of the testator’s QRI and downsizing addition (if any) limited to the
RNRB (see 8.10 below as to the donee); and
(c) a gift of the residuary estate upon trust for the surviving spouse absolutely, or on IPDI trusts.
The nil rate band legacy, being to a discretionary trust, will not amount to a closely-inherited gift of a QRI or of the downsizing addition.
The combination of a nil rate band legacy and a RNRB gift will maximise the value passing outside the estate of the surviving spouse, which may assist in keeping that estate within the taper threshold (see 8.11.5 below). A nil rate band legacy and a RNRB gift, will also be advantageous if the value of such assets, outside the estate of the surviving spouse, is greater than the value of the TNRB and the brought-for.ward allowance would be on the death of the surviving spouse.
8.10. Destination of RNRB gift
The gift of the QRI and downsizing addition (if any) could be made to:
(a) direct descendants absolutely;
(b) direct descendants on IPDI trusts; or
(c) the discretionary trust to which the nil rate legacy is payable.
A gift of a QRI to children absolutely may compromise the security of the surviving spouse in the former matrimonial home. A gift of the QRI upon IPDI trusts for children and/or grandchildren may, therefore, be preferable. The surviving spouse could be a trustee, and be given the power to appoint new trustees. The nil rate band discretionary trust and the IPDI trust will be “related settlements” for the purposes of IHTA 1984, s. 62, having been made by the same settlor on the same day. However, the value of property in a related property settlement which has never been relevant property will be excluded when calculating periodic and 10-year charges (IHTA 1984, s. 66(4) and 68(5)).
The other option is to give a share in the residence, limited to the RNRB, plus any downsizing addition, to the nil rate band discretionary trust, in addition to the nil rate band legacy, with a view to making appointments within 2 years of death, within IHTA 1984, s. 144, to direct descendants absolutely so as to take advantage of the RNRB. Alternatively, there could be an appointment to the surviving spouse absolutely or on IPDI trusts, which would be retrospectively exempt. Either way, there will be an up-front liability for the IHT payable on the first death which would have to be reclaimed following the appointment. The discretionary trust could even be continued beyond the 2-year period, even though this would mean that exit and 10-year charges would be taxed at more than the nil rate.
8.11. Married Couples
8.11.1. Estate to surviving spouse absolutely or on IPDI trusts on first death
On the first death of a married couple, it would not generally be advisable to make a RNRB gift to direct descendants. A married testator should generally be advised to leave their QRI to their surviving spouse, either absolutely or on IPDI trusts, rather than leaving the whole, or part of sufficient value to claim the maximum RNRB, to direct descendants.
The transfer on the first death will be spouse exempt. No use will have been made of the RNRB, with the result that the brought-forward allowance will be available on the second death. The TNRB will also be available.
Trevor dies in 2017/18 leaving his whole estate of £1m including his share in the matrimonial home, to his wife, Tina, absolutely. The residential enhancement in 2017/18 is £100,000. Tina dies in 2020-21 leaving her whole estate, including her home, to her children. Tina’s residential enhancement in 2020-21 is £175,000, and an SNRB and TNRB of £650,000. Tina’s estate is worth £1.8m.
Tina’s estate will be entitled to a RNRB in 2020-21 of £350,000 (including a brought-forward allowance of £175,000). This will save more IHT than if Trevor had left a QRI on his death equal to his RNRB (£100,000) and Tina’s RNRB were limited to £175,000, with no brought-forward allowance. In short, due to the increase in the RNRB between 2017/18 and 2020-21, it would be better to make use of a 100% up.lift in the RNRB on the second death, rather than the lower RNRB on the first death.
8.11.2. Testator entitled to brought-forward allowance, but spouse not
There are, however, some cases where it would be advisable for a married couple to make use of the RNRB on the first death. One situation arises where a married testator has been previously married, and the brought-forward allowance is available from that previous marriage.
William and Mary are married, and their home is owned by them in equal shares. William was married to Anne when she died before 6 April 2017 (the RNRB not then being available). The RNRB was, therefore, unused on Anne’s death, so that William is entitled to a brought-forward allowance, equal to 100% of the residential enhancement on his death. William marries Mary in 2017/18, and leaves his whole estate to her, if she survives him (which she does).
The brought-forward allowance from Anne will be wasted if William leaves his whole estate to Mary. Mary’s estate cannot claim the benefit of the brought-forward allowance to which William’s estate was entitled, since Mary was not married to Anne. It is only possible for P to claim a brought-forward allowance from a “related person” being a person who dies before P, where P is that other person’s spouse or civil partner, immediately before that other person died (IHTA 1984, s. 8G(2)) (but see 5.9 above).
In order to avoid wasting the brought-forward allowance from Anne, William could make a gift, if he predeceases Mary, of such share in his QRI and of any downsizing addition as is sufficient to utilise his brought-forward allowance (but not necessarily his residential enhancement) to his direct descendants absolutely or on IPDI trusts. His residuary estate would pass to Mary.
It may be that William is only entitled to, say, 50% of the brought-forward allowance, e.g. because Anne dies on or after 6 April 2017, and utilises 50% of the RNRB on her death. However, William can still make a gift sufficient to make use of his brought-forward allowance (whether it is 100% or less).
8.11.3. Testator’s spouse, but not testator, entitled to brought-forward allowance
It may be that the testator’s spouse, but not the testator, has been married before and is entitled to a brought-forward allowance from a previous marriage.
William and Mary are married, and own their home in equal shares. Mary, but not William, has been married previously. She is entitled to a brought-forward allowance equal to 100% of the residential enhancement, following the death of her former husband, Charles, before 6 April 2017. She survives William.
If William leaves his share in the matrimonial home to Mary, her estate will only be entitled to one brought-forward allowance, but not two, from both William and Charles (IHTA 1984, s. 8G(3)(d)). William would be better advised, if he predeceas.es Mary, to make a gift to his direct descendants absolutely or on IPDI trusts of such a share in his QRI, and any downsizing addition, as is sufficient to utilise his RNRB to the maximum. In this way, the RNRB on his death will not have been wasted.
Mary may be entitled to 50% of the brought-forward allowance from Charles, e.g. if Charles dies on or after 6 April 2017, and 50% of the RNRB is utilised on his death. William might then make a gift to direct descendants of a share in his QRI, and any downsizing addition, sufficient to ensure that his estate obtains the maximum benefit of the RNRB, but without reducing the amount by which the RNRB applicable on the death of Mary would otherwise be increased by the brought-forward allowance on his death. This should enable her to claim a 100% brought-forward allowance.
8.11.4. Both spouses entitled to brought-forward allowances
In such a case, both spouses should make gifts to direct descendants, absolutely or on IPDI trusts, of a share in their QRI and any downsizing addition sufficient to ensure that their estate obtains the maximum benefit of the RNRB, but without reducing the amount by which the RNRB applicable on the death of the survivor would otherwise be increased by the brought-forward allowance on the first death. Other.wise, the full RNRB (residential enhancement and brought-forward allowance) will be wasted on the first death.
8.11.5. Avoidance of tapering in estate of surviving spouse
It may be advisable for the predeceasing spouse to make a RNRB gift in order to avoid bunching in the estate of the survivor leading to tapering of the RNRB on the death of the survivor, e.g. where the respective estates of each spouse are less than £2m, but their combined estates may exceed £2m.
William died in 2018/19 with an estate of £1.7m, including a half share in the matrimonial home worth £750,000. William leaves the whole of his estate to his wife, Mary, with whom he has children. She has an estate of £800,000 in her own right. She survives William, but dies in 2020/21 with an estate then worth £2.7m. She leaves her estate, including the former matrimonial home, to the children.
Although Mary’s estate would be entitled to a residential enhancement and brought-forward allowance, the RNRB would be reduced to nil due to tapering (see 4 above). William could, instead, have made use of his full nil rate band on death (£325,000 plus RNRB of £175,000 = £500,000) by including a nil rate band legacy and a RNRB gift in his Will. His estate will be entitled to the RNRB (being less than £2m). Mary’s estate will not include the assets, then worth £500,000, which passed into the nil rate band trust on William’s death (which, if worth £700,000 on her death, should mean that her estate does not exceed £2m).
Mary should make a Will in similar terms, in the event that William survives her, keep.ing £500,000 out of William’s estate on her death, so that his estate on death does not exceed £2m.
8.11.6. Gift to step-child of one party to marriage
Mark and Amanda are married. Mark was previously married to Peggy, who already had a child, Ben, by a previous marriage. Mark and Amanda have no children.
Mark might be advised to make a RNRB gift to Ben. A person who is at any time a step-child of another person is to be treated, at that and all subsequent times, as if the person was that other person’s child (IHTA 1984, s. 8K(3)). Ben is, therefore, treated as being Mark’s child, but not Amanda’s. If Mark left his QRI to Amanda, who survives him, for life, and subject thereto, to Ben absolutely, the RNRB would not apply on Amanda’s death. However, if Mark left a QRI, limited to the RNRB, to Ben on his death, the QRI would be closely inherited.
8.11.7. Gift to direct descendants of downsizing addition
If the matrimonial home has been sold during the joint lifetime of a married couple, a gift of the downsizing addition to the direct descendants, on the first death, might be advisable.
Paul and Chrissie are a married couple with children. Paul was the sole owner of the matrimonial home worth £500,000. He sold the home on or after 8 July 2015 and moved into rented accommodation with Chrissie. Paul dies first in 2017/18, with an estate worth less than £2m, leaving his estate to Chrissie absolutely. Chrissie dies in 2020/21.
On Paul’s death, the downsizing addition would be nil: none of his QRI would be closely inherited, as his estate passes to Chrissie (IHTA 1984, s. 8F(2)). An amount equal to Paul’s default allowance (£100,000) would be available for carry-forward for the benefit of Chrissie’s estate (IHTA 1984, s. 8F(3)). However, the RNRA on Chrissie’s death will be nil: she does not own a QRI, and is not herself entitled to a down.sizing addition because she had no interest in the former matrimonial home. She is not entitled to claim a downsizing addition in respect of Paul’s former interest in the matrimonial home. The benefit of Paul’s downsizing addition will, therefore, be lost.
Paul might, therefore, be advised to leave an amount equal to the downsizing addition to his children absolutely, or on IPDI trusts, if he is survived by Chrissie and the downsizing addition is available on his death.
8.11.8. 2-year discretionary trust on first death
This may be an attractive option (see 8B below).
8.11.9. Surviving spouse
A surviving spouse with children or grandchildren might normally be expected to leave their estate, or the majority of it, including any QRI, to their children or grand.children absolutely, or on IPDI trusts.
However, it may be that the primary, intended, beneficiary is not a direct descendant.
Frank is a widower. He has a grown-up grandchild, Tim. He has also a close friend.ship with Tricia, whom he would like to be the main beneficiary of his estate.
In order to make full use of the RNRB, Frank could make a gift of his QRI and any downsizing addition, limited to the RNRB, to Tim absolutely or on IPDI trusts, and the remainder of his estate to Tricia (perhaps for life, remainder to Tim absolutely).
Alternatively, he could settle the QRI and any downsizing addition on IPDI trusts for Tim, and his trustees could (pursuant to a letter of wishes) terminate Tim’s IPDI, in whole or in part, in favour of Tricia absolutely shortly after his death, giving rise to a deemed PET by Tim. Indeed, Frank’s Will could provide that Tim’s IPDI should terminate, say 6 months after his death. The RNRB would apply on Frank’s death, since a direct descendant (Tim) would inherit by virtue of his IPDI, even if it is subsequently terminated (see 3.9.3. above).
Another option is a 2-year discretionary trust (see 8B below).