IHT main residence nil rate band – why some families risk losing it

An extra IHT allowance called the main residence nil rate band (RNRB) is available to homeowners.

The first £125,000 of a homeowner’s property is exempt from inheritance tax. This is seen as good news for people who worry that the family home might have to be sold to pay inheritance tax.

The IHT main residence nil rate band is in addition to the normal IHT nil rate band available to every person and which currently stands at £325,000.

The new IHT main residence nil rate band is due to rise to £175,000 per person in 2020.

The Chancellor’s £1 million give away!

So by the tax year 2020 – 2021 each homeowner could leave assets worth £325,000 + £175,000 = £500,000, or £1 million pounds per couple.

Where’s the catch?

Yes, there has to be a catch, doesn’t there?

The main residence nil rate band is only available if certain conditions are met.

The conditions are that:

• the property or a share of the property is being inherited by direct descendants
• the property is a residential property
• the new nil rate band will only apply on death, not on lifetime gifts
• the property must have been the deceased person’s residence at some point

Is there a problem with discretionary trusts and the residence nil rate band?

If you don’t leave your property outright to direct descendants the main residence nil rate band won’t be available. So for example, if you leave a share of your property in your Will to a discretionary trust your estate won’t qualify unless the trustees take special steps.

Discretionary trusts are often used in estate planning because they are very flexible and offer good opportunities to preserve assets and benefit a wide group of people.

“The new main residence nil rate band conditions might not be met where a discretionary trust is used.”

The problem is assets passing into a discretionary trust on death are not inherited directly by the deceased’s descendants. It’s the trustees who become the new owners of the property or a share of it.

Even if the trustees are children or grandchildren of the deceased homeowner, they are receiving the property in their role as trustees and not outright as direct descendants.

Should you get rid of a discretionary trust in your Will?

Not necessarily. There may be other reasons why it is beneficial to make use of a discretionary trust. If you are concerned about:

• preserving the family home from the worst effects of care fees
• or there are wayward children,
• or a risk of divorce or bankruptcy in the family.

There’s more than one way to crack an egg – and solve an IHT problem!

Another reason not to rush into ditching a discretionary trust is that there are steps you or your trustees could take to preserve the benefits of using a discretionary trust and make sure the IHT residence nil rate band isn’t lost. Read more

We, lawyers, are an inventive lot. Where there’s a stumbling block it’s our job to help you work around it – legitimately, of course!

So don’t ditch your discretionary trust without thinking it through carefully. Get professional advice on the various options and remember that tax savings are always a moveable feast so keep informed and up to date and be prepared to make changes when necessary.

Ask us about our sensible estate planning solutions. For more details look at our Services

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