We consider why some solicitors have chosen not to advise their clients on the Residence Nil-Rate Band tax saving opportunity.
Background As has been widely-publicised in the mainstream press, significant reforms to the Inheritance Tax regime were introduced on 6 April 2016. These reforms introduced the "Residence Nil-Rate Band", which became effective on 6 April 2017.
In essence, the Residence Nil-Rate Band, where available, will serve as a top-up to the ordinary Nil-Rate Band to which an individual's estate looks to for Inheritance Tax relief following his or her death.
Up to £1,000,000 IHT relief
The new value of the new relief will be augmented in annual increments over the next four years from 6 April 2017. The maximum possible enhancement is, from 6 April 2017, initially limited to £200,000 per couple. The maximum value of the enhancement will rise by £50,000 each year until 2020, when a maximum figure of £350,000 per couple will be available.
With the current maximum combined "ordinary" Nil-Rate Band of £650,000 available on the death of the second of a couple remaining in situ until at least 2021, some couples will therefore have a combined Inheritance Tax Nil-Rate Band of £1,000,000 from 6 April 2020 onwards. For those who so qualify, the addition of £350,000 of Residence Nil-Rate Band will confer a saving of up to £140,000 in Inheritance Tax.
Why are some solicitors opting against advising on this relief? The reforms are however complicated and, as ever, the devil is in the detail. What has come to light since the introduction of the reforms in April is that some firms of solicitors are either refusing to advise on the availability of the new Residence Nil-Rate Band (because it is perceived as being too complicated) or (more worryingly) are providing erroneous guidance on this topic.
8 Common misconceptions about this IHT relief
1. The starting point for any client will of course be in ascertaining whether any additional relief will be available at all.
Many commentators and advisers claim that in order for the Residence Nil-Rate Band to be available, an individual's residence or an interest in a residence (a half share of a property, for example) must pass to his or her children or grandchildren. This is only part of the story, however. The new rules will confer Residence Nil-Rate Band in instances where a residence or an interest in a residence passes to someone who is "closely related". The definition of this term is broad and includes a "lineal descendant" or a spouse/widow/widower of a lineal descendant. The scope of lineal descendant for the purposes of the regime is rather wider than one might assume and includes children/ step-children/foster children/natural children adopted by someone else/ grandchildren/great-grandchildren and the spouses/widows/widowers of any one (or more) of those individuals.
2. Many commentators have also failed to acknowledge that the new regime does not confer a flat-rate enhancement in a given case. The values which are conferred by the Residence Nil-Rate Band are "maxima".
This means that the value of the enhancement will be capped at the value of the deceased's interest in the residence in question. If the interest, say the family home, was worth £250,000, that is all that the enhancement can ever equal, even after 6 April 2020 (when a maximum figure of £350,000 per couple will be available) and irrespective of the value of his or her other assets.
3. A further point some commentators have erred on is the significance of the date that the new Residence Nil-Rate Band was introduced.
The enhancement came in to force on 6 April 2017 and applies to deaths thereafter, as one would expect. What some commentators have not picked up on, however, is that the death of the first of a couple before 6 April 2017 will not deny the survivor's estate access to additional relief.
|To give an example, the estate of a widow who dies in May 2020 may benefit from a maximum £350,000 top up even if her husband died in 1990 - the date of the first death being completely irrelevant for the purpose of calculating the value of the Residence Nil Rate Band her estate benefits from.|
4. The downsizing provisions within the new rules are complex and have been omitted from much of the guidance materials provided by advisers.
It is wholly incorrect to assume that an individual cannot benefit from the Residence Nil-Rate band just because their main residence was sold in order for them to live in residential care before his or her death, for example.
5. Another point which some advisers have failed to identify is the interaction of the new enhancement with any debt on the interest in the residence.
It is only the equity in a property which will be relevant for determining the value of the Residence Nil-Rate Band that will be available. Going back to the example given earlier of the family home worth £250,000, if there is a mortgage of £65,000 outstanding on the property as at the date of the death of the second of the couple the maximum enhancement conferred by the Residence Nil-Rate Band will be £185,000 not £250,000.
6. An important point which has seen extremely little commentary is that the interest in the residence relevant to the calculation of the additional relief need not be that individual's main residence.
There is scope for an interest in a second home, perhaps overseas, to qualify the estate for additional relief. This could be an important consideration where the survivor of a couple may wish to leave his or her interest in the main residence to someone other than a lineal descendant or the spouse/widow/widower, see above for the full list of eligible beneficiaries.
7. Some commentary has failed to explain that the availability of Residence Nil-Rate Band is scaled back on any estate with a gross value of more than £2m (£1 of relief being withdrawn for every £2 of value over £2m).
This means that if a couple have an estate worth £3m there can be no Residence Nil-Rate Band enhancement without the adoption of estate planning measures during their lifetimes.
8. Finally, some commentators have made broad statements to the effect that if a Will contains a Will Trust (a Discretionary Trust, for example), it must be replaced for that individual's estate to stand any chance of claiming the additional relief.
It is important to note that many Will Trust structures will in fact be flexible enough to enable the relief to be claimed. However, it is vital that Wills including Will Trusts are reviewed by expert advisers to confirm the position.
Guidance As ever, the importance of obtaining advice on legal issues from appropriate professional advisers who are experts in their field cannot be overstated. It is recommended that all clients review their Wills in light of the new Residence Nil-Rate Band regime and take appropriate advice if they wish to seek confirmation as to how the new rules may affect the Inheritance Tax burden on their estate (and what can be done about it).