IHT RNRB or Residence Nil Rate Band allowance was introduced in April 2017. It’s available to increase the amount home-owners can leave free from Inheritance Tax when they die.
A deceased person’s estate qualifies for the extra allowance if their property passes to a direct ‘lineal’ descendant – a child, grandchild etc.
Trustees, Discretionary Trusts and IHT RNRB
Have you been appointed as a trustee or executor of a Will that contains a Discretionary Trust?
You might have spotted newspaper articles that say the Testator’s family won’t be able to benefit from the Residence Nil Rate Band (“RNRB”) of £125,000 per person (2018/19).
It’s been suggested that anyone leaving their property to a Discretionary Trust will not satisfy the ‘lineal descendant’ rule and will lose out on this important new IHT relief.
So, should Discretionary Trusts be scrapped?
“Why lose out on Discretionary trust protection?”
It’s important to remember there are a variety of reasons why Discretionary Trusts are so widely used in Wills. Many people are attracted by the protection they offer.
If a Testator leaves an asset outright to a child or grandchild rather than via a Discretionary Trust they lose the protective benefit of the trust arrangement.
Think what would happen if the child or grandchild gets into relationship difficulties such as a divorce or financial difficulties such as bankruptcy?
Or what if the child or grandchild requires long-term care or has a learning difficulty or is vulnerable to financial manipulation?
These are all situations that Discretionary Trusts can protect against very effectively.
“The answer lies in the very flexible nature of Discretionary Trusts“
Can you have your ‘tax’ cake and eat it?
It is possible to keep the flexibility and protection that you get from a Discretionary Trust and avoid missing out on the IHT RNRB.
The answer lies in the very flexible nature of Discretionary Trusts. The recent news reports about the RNRB have rarely mentioned that there is legislation that can help Trustees of a Discretionary Trust to make sure the benefit of the RNRB isn’t lost.
Trustees of a Discretionary Trust can make use of a less well-known section of the Inheritance Tax Act 1984. Trustees have the power to choose a lineal descendant to inherit a share of the property or an interest in it. If they do that within two years of a death it is treated for IHT purposes as if that was what had been the position from the date of death.
HMRC has confirmed that from March 2017 the IHT RNRB can apply where the deceased’s property transfers to a Trust provided there is a ‘Qualifying Life Interest’. This means if the Trustees give a life interest in the property to a child (or direct descendant) of the deceased the estate gets the benefit of the extra IHT RNRB. With the added bonus that the property still remains in the Trust. You don’t need to scrap the Discretionary Trust.
The Trustees have 2 years to pick a child or grandchild to receive the ‘Qualifying Life Interest’. So, problem solved. Well, may be not…
But what if the Trustees forget?
Most people choose family members or friends to be their Trustees. You’re not necessarily going to remember to take action within the 2 years following the property owner’s death if you’re not a professional trustee or executor.
What about a Trust that:
a) gives the Trustees the power to choose the person to receive the Qualifying Life Interest at the date of death, and
b) also makes sure that if the Trustees forget to do so, IHT RNRB can still be secured IN ANY EVENT.
| The answer could lie here – a Flexible Family Trust. It’s a trust that gives the Trustees power within two years of death to pick a lineal descendant with the added advantage and security that if the Trustees delay or do nothing, the Trust defaults to give a Qualifying Interest to a lineal descendant, ensuring that the IHT RNRB allowance is not lost.
If the Testator/Settlor hasn’t yet died you could ask them to look into the Flexible Family Trust solution. If they have already passed away you may need to act fast to avoid the mistake of accidentally denying the deceased’s children IHT RNRB.
“I want my child to have access to capital and income“
A Testator might be worried by the thought of the Trustees creating a life interest (also known as an ‘interest in possession’) after the Testator’s death.
A life interest gives the beneficiary the right to receive income from the asset held by the trustees. One of the reasons for choosing a Discretionary Trust is to have the flexibility to give capital or income to the beneficiaries. Surely it defeats the object of creating a Discretionary Trust if the Trustees are forced to give a child a life interest, doesn’t it?
Well, the clue is in the title ‘Flexible Family Trust’. Trustees only need to give an ‘interest in possession’ to the child long enough to qualify to get the IHT RNRB allowance. The Trustees then have the flexibility to revert the trust back to Discretionary Trust mode.
Book a consultation to find out more…
Trustees and executors carry ultimate responsibility and personal liability for losses to a trust. That includes failing to secure the maximum tax relief and allowances available.
Why not make use of your BE My Own Lawyer membership to book a telephone consultation (free for Plus and Plus One members)? Find out more about Flexible Family Trusts and how Trustees can use them.
Use the contact form below to get in touch.
This is a BE My Own Lawyer members’ exclusive article.
Disclaimer: This article is for information purposes only. It is not legal advice. Before taking any action in relation to any of the issues mentioned in this article readers should seek professional advice. Barker Evans Private Client Law accepts no liability in respect of any action taken or not taken in consequence of reading this article.
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