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Readers’ forum: Trust in me

/ 25 September 2018

Terry Jordan

Writing for Taxation magazine, BKL tax adviser Terry Jordan answers a reader’s query on the transferable residence nil rate band.

My elderly client, Andrew, died on 30 April 2017. His estate comprised only a one half-share interest in the family home and £25,000 cash. accepted the value of the interest in the property to be £275,000. There were no liabilities and no gifts out of capital to consider. In his will, Andrew left all his estate on discretionary trusts, the beneficiaries being his widow Jane, their four children and various grandchildren.

Andrew’s estate is wholly covered by his nil rate band. His unused nil rate band is £25,000, or 7.692% of any enhanced band.

Jane moved later to an annex provided by one of her daughters. The property has now been sold for £530,000 less costs of £10,000. One half of the net proceeds has been paid into Jane’s bank account. Her other personal investment assets stand at £240,000, so there is an overall estate of £500,000. Again, there are no liabilities and no gifts out of capital to consider.

In her will, Jane has left everything to the four children. I have three questions:

  • If Jane died today could her executors claim her residence nil rate band of £125,000 as well as her own and the balance of her husband’s nil rate bands?
  • Would Jane have any entitlement to her husband’s unused residence nil rate band, even though his estate was not closely inherited?
  • What would be the tax implications of breaking the discretionary trust now and distributing the assets to the children or grandchildren?

Clarification on these issues would be appreciated.

Query 19,237– Noble.

Reply by Terry ‘Lacuna’ Jordan, BKL

The residence nil rate band is available on the second death.

In 2007, George Osborne announced that the Conservatives would make the inheritance tax nil rate band £1m and the public reaction to the promise is widely thought to have dissuaded Gordon Brown from calling a general election that autumn. Once elected with a majority in 2015, the residence nil rate band was introduced with byzantine complexity – see IHTA 1984, s 8A to s 8M. Not until 6 April 2020 will a couple who are married or who are civil partners potentially have combined ordinary and residence nil rate bands worth £1m.

Andrew’s estate was below the ordinary nil rate band and his share in the property (it is implicit in the query that it was owned as tenants in common) did not pass to a direct descendant, so he used none of his residence nil rate band. Potentially, Jane’s estate will benefit from the transferred residence nil rate band which will not taper because neither estate exceeds £2m in value. Because Jane has sold her interest in the property it will be necessary to consider the ‘downsizing’ provisions.

We can answer Noble’s three questions as follows.

First, If Jane died today would her executors still be able to claim her residence nil rate band of £125,000 as well as her own and the balance of her husband’s nil rate bands? Yes, as above, Andrew’s transferred residence nil rate band, as well as her own and the small proportion of Andrew’s ordinary nil rate band that was not used, are available. This is the caveat that Jane’s estate needs to contain assets worth as much as her share in the property when it was sold.

Second, Would Jane be entitled to her husband’s unused residence nil rate band, even though his estate was not closely inherited? Yes, precisely because it was not closely inherited.

Finally, what would be the tax implications of breaking the discretionary trust now and distributing the assets to the children or grandchildren? Because two years have not yet elapsed, outright appointments in favour of children or grandchildren would be read back to the date of death under s 144 and treated as if included in Andrew’s will in the first place. Since children and grandchildren are direct descendants, Andrew’s residence nil rate band of £100,000 would be used and none would transfer to Jane. Andrew’s estate would then use £200,000 of his ordinary nil rate band and the unused proportion would transfer to Jane.

This article is also available on the Taxation website.

For more information, please get in touch with your usual BKL contact or use our enquiry form.

Terry Jordan

Senior Adviser, Private Client

T +44 (0)20 8922 9360
E terry.jordan@bkl.co.uk

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