The Residence Nil Rate Band – traps and pitfalls

The Residence Nil Rate Band (“RNRB”) is now with us. See Greg Dixon’s article “The residence nil rate band – time to review my estate planning?” for a summary of the new rules, but here we look briefly at some of the potential traps and pitfalls.

The property must have been the deceased’s residence

The RNRB only applies to a home which has been lived in as the person’s residence during a time when they owned it. It does not have to be their residence at the time of death, but the allowance does not apply to a property that has always been rented out.

The RNRB is limited to the net value of the property

If the property is subject to a mortgage, that will reduce the net value of the property and potentially the amount of the allowance. This may be a problem for surviving spouses or civil partners who have “nil rate band discretionary trusts” set up under the Will of their late spouse or partner. These trusts were often set up using an IOU which was secured on the property by a legal or equitable charge, and that charge will now reduce the net value of the property owned by the surviving spouse.

Problems for unmarried couples

Married couples and civil partners can transfer their unused RNRB to the survivor but this is not possible for unmarried couples. Also, although the definition of lineal descendants is extended to include step children, it does not include the children of an unmarried partner.

Unmarried couples who want to take advantage of the RNRB will each need to leave their interest in the property to their own lineal descendants, which may cause problems if the surviving partner intends to continue living in the property.

The RNRB is restricted if the net value of an estate is more £2 million

Deathbed gifts may help to preserve the RNRB in these circumstances, but the restriction also applies when looking at the transferable RNRB, so if the first spouse or partner to die had a net estate worth more than £2 million, then even if the survivor’s estate is below that figure on death, the allowance will be restricted.

Trusts

The RNRB can still apply to trust arrangements provided it is the “right kind of trust” and this applies both to trusts which are already in existence and to trusts which will come into effect under a person’s Will.

This is a complex area but it is essential to review existing trusts now, particularly if those trusts own all or part of a property which is occupied as a residence by the surviving spouse or partner, to ensure that the RNRB will apply on the death of that spouse or partner.

These are just some of the circumstances in which the RNRB might be restricted or not available at all. Sadly, the rules for this new allowance are extremely complicated, and it is to be hoped that the government might take steps in the future to simplify this already complex area of tax law, but in the meantime, we can help you review your existing Wills and trusts and advise whether changes are needed.