Since its introduction in 2017 the residential nil rate band has caused confusion amongst both practitioners and lay people. Where it applies, it can be worth up to £175,000 (but can never exceed the value of the property) and any unused allowances can be claimed by a spouse's estate. On the face of it, the ability to claim the residential nil rate allowance is fairly straightforward: it is available in cases where the deceased left their estate to lineal descendants (children/grandchildren etc) and the element left to those descendants includes their home, or the proceeds of sale of their home if they moved into care on or after 8 July 2015.

The definition of lineal descendants includes stepchild  but would not include the child of a cohabitee or nieces and nephews. As such unmarried or single individuals often loose this allowance.

There is also a taper threshold, above which the allowance is chipped away. If the estate exceeds £2 million then the value of the residential nil rate band is lost by £2 for every £1 over that threshold.

There are however several factors which can also impact the availability of the residential nil rate allowance for an estate, or at least complicate the ability to claim this allowance:

1. Discretionary Trusts in the Will- on the face of it, no beneficiary under a Discretionary Trust has an entitlement, even if the named class of beneficiaries are exclusively children or grandchildren. As such, estates which include Discretionary Trusts often loose the residential nil rate band. There can however be very good reasons to include Discretionary Trusts in a Will, either for intergenerational tax planning or where there is a vulnerable beneficiary. It is also possible to rekindle the residential nil rate allowance if appointments are made out of the Discretionary Trust to lineal descendants, of a sufficient value to utilise the allowance, and these appointments are made within 2 years of the date of death. This is because appointments out of Discretionary Trusts within 2 years of setting them up are treated for tax purposes as though the trust never formed over that element. This reading back provision is essentially intended as an anti-avoidance measure, to prevent people from using Trusts to briefly shield assets. However in the case of Discretionary Trusts in Wills it can be an extremely useful tool to restore this allowance. This only applies to relevant property trusts, which include Discretionary Trusts and gifts to grandchildren as set out below.

2. Funds for grandchildren at an age older than 18- it is really common to include an age contingency on gifts to grandchildren, and is generally something I recommend clients consider. However if a grandchild inherits funds below the contingent age then their interest is not absolute and so the residential nil rate band does not apply. This changes if they would reach that age contingency within 2 years of the date of death, or if they acquire a right to income within 2 years of death. This automatically is the case when a beneficiary reaches the age of 18 under s31 Trustee Act 1925.A similar issue arises where the estate is left on life interest for a cohabitee and then on to children but including an age contingency. This issue is almost specific to unmarried couples, as no inheritance tax arise where life interests are included for spouses.

3. Lifetime Asset Protection Trusts- this type of arrangement encourages the individual to place their home on trust during their lifetime. The aim is often to protect the property from care fees (see this article for an explanation of the dangers in this approach) or to avoid the need for probate to administer their estate. The issue here is that these trusts usually give the donor a right to live in the property for life and then onto a Discretionary Trust for their children. By placing the property on trust it is outside of their estate, however the right to live there amounts to a gift with a reservation of benefit. As such, even if probate isn't needed the executors are still required to submit a return  to HMRC in relation to inheritance tax. If the property passes to children directly then the residential nil rate allowance is available. However where the funds pass to a Discretionary Trust on the donor's death then the property value is included in their estate as a gift with a reservation of benefit but no residential nil rate allowance is available as the 2 year appointment out of the trust (shown in point 1 above) does not apply. This really is the worst case scenario.

If you would like help in planning your estate to fully utilise your available allowances, or if you wish to rekindle the residential nil rate band in an estate then please contact Ashley Minott by email or on 01494 893518.