How the residence nil rate band could impact your clients.
The introduction of the Residence Nil Rate Band (RNRB) on the 6 April 2017 is undoubtedly the most significant change we have seen to Inheritance Tax (IHT) legislation for almost a decade.
Many financial planners are only now getting to grips with the legislation and are considering how the RNRB will impact upon individual estates and IHT planning strategies.
This article specifically considers how the RNRB impacts and interacts with the use of Business Property Relief (BPR) based IHT planning – which can reduce an investor’s IHT liability in just two years.
Many estates will be entitled to a RNRB if the individual dies after 5 April 2017. Not every estate will benefit however, as the RNRB will only be available where an interest in a qualifying property (or assets representing it under the downsizing provisions) is being left to lineal descendants on death.
However, not everybody has an interest in a qualifying property and not everybody has lineal descendants that they can leave the property interest to. Siblings, nephews and nieces are not included in the definition of a lineal descendent.
This reminds me of a client I previously advised who for the purposes of this article, we will call Peter. Peter had accumulated significant assets during his lifetime and at the age of 70, was single with no children/grandchildren.
From an estate planning perspective, he wanted to leave the majority of his estate to his nieces and nephews, but had no motivation or desire to make lifetime gifts to them. He did see the merit in taking some IHT planning measures but did not want the planning to compromise his own financial position.
When I first met Peter, the introduction of the RNRB had not been mentioned, but of course as it transpires it is of no benefit to Peter anyway.
The estate planning that we put in place consisted of some charitable legacies and BPR investments. The charitable legacies were set at a level that provided a reduction in the IHT rate for Peter’s residual estate.
The BPR investments were favoured by Peter as they did not compromise his lifetime position, access was retained and they offered both relief from IHT after two years and investment diversification benefits. This flexibility of BPR investments could appeal to people in a similar position to Peter.
For those that will benefit from the RNRB, their potential IHT position could have changed significantly post 5 April 2017.
Case study
Betty is a widow with a total estate value of £900,000. Her estate comprises of a house valued at £600,000, investments of £200,000 and cash of £100,000. Full transferable nil rate bands are available from Betty’s deceased husband’s estate and she plans to leave her estate to her adult children. The potential IHT liability of Betty’s estate is considered in table 1.
