The RNRB and the death of Inheritance Tax planning

Considering 2016’s announcement of the Residence Nil Rate Band (RNRB) and the extensive media coverage since, it’s surprising how often I’m told by prospective clients that they don’t need inheritance tax (IHT) advice. Usually, the conversation starts along the lines of:

‘No thanks, I’m not interested in Inheritance Tax Panning because my estate is valued below the £1 million allowance.’

It’s almost always a surprise to them when we discuss things in more detail and they learn that, even if they tick all the right boxes, the current RNRB is actually £100,000, not £175,000 as many believe. This gives a married couple a maximum joint allowance of £850,000 rather than the £1 million they had factored in. If the estate is valued between these two figures, then there will be an IHT liability payable.

There are a number of other factors that can affect the RNRB – for example not having children, having an estate valued at more than £2 million, or a couple not being married / in a civil partnership. Asking these few simple questions is usually enough to pique the interest of prospective clients and highlight the value of the advice I can give. But when a client isn’t aware of the intricacies, it’s understandable that they don’t want to spend time and money discussing something they don’t believe is an issue.

Despite wide-ranging public criticism by professionals for both its complexity and its restrictive scope, many clients and non-professionals remain woefully ignorant about just how the RNRB works and its many criteria.

The Facts

• The RNRB is only available for those leaving an interest in a residential property to direct lineal descendants
  
  
• The definition of direct lineal descendants includes step children as well as biological children (and the children of those children, step or otherwise and so on)
  
  
• It does not apply to those who do not have children

This last point is particularly interesting when you consider that in 2013 the Office for National Statistics calculated that women born in 1967 were almost twice as likely not to have children as those born in 1940.

Other stipulations that must be considered include:

• The residential property must have been lived in by the deceased throughout the period of ownership
  
  
• Provisions are established for those who are downsizing or are going into care – replacing a larger property with one of lesser value will bring another level of complexity that will require professional advice
  
  
• Estates of more than £2 million will be subject to a tapering where the value of the RNRB will drop by £1 for every £2 over that threshold. An estate of £2.2 million will therefore receive zero RNRB relief. This can be particularly relevant to the surviving partner or spouse

Despite the misconceptions, we are contacted by many prospective clients who already have their Will in place but who are concerned by the use of discretionary trusts. The most common misconception is that such instruments prevent the application of the RNRB against the estate value.

This is not entirely correct. Discretionary trusts remain the most flexible way in which to structure a will - although they certainly come with their own complications. As long as the executors act smartly under considered legal and tax advice, the RNRB may not necessarily be lost.

In some circumstances, when dealing with immature or spendthrift beneficiaries, it can be more efficient in the long term to lose the RNRB by retaining the discretionary trust than it is for funds to be under the sole control of a beneficiary who may squander the inheritance.

Legacy of past practices

Professional advisers have steered away from the use of trusts as a tax planning tool over the last decade and this seems to have been compounded in the recent coverage surrounding the RNRB. It would appear that those with an IHT issue have been lured into a false sense of security and those with trusts in their wills are being persuaded to remove them in favour of more ‘straightforward’ wills.

The potential effect of this is twofold; firstly, fewer estates will benefit from protection when it comes to the payment of care fees for a surviving spouse who now owns 100% of the marital assets; and secondly the surviving spouse has a much larger estate increasing the likelihood that the RNRB will be completely eroded. In both cases the state wins and the individual loses.

In conclusion, the best course of action is clear. Regardless of how well-made you believe your plans to be, it never hurts to check things through. Wills should be reviewed periodically anyway, so why not take a little time to make sure that your estate is protected and your loved ones provided for in the best possible way?

Let BPE’s experts take the complex and make it straightforward. It’s what we do, we call it Brilliantly Simple and it forms the basis of all our advice.

Jennifer Charlton qualified in 2009 and is a fully accredited member of SFE, a full member of STEP and the Probate Section of the Law Society. She joined BPE Solicitors in November 2016 as an Associate Solicitor and she specialises in preparing wills for a wide range of clients, with particular focus on inheritance tax and the protection of family assets, the administration of trusts and estates, the preparation of Lasting Powers of Attorney and applications to the Court of Protection.

If you would like more information, please visit www.bpe.co.uk or call 01242 224433.

These notes have been prepared for the purpose of articles only. They should not be regarded as a substitute for taking legal advice.