Residential Nil Rate Band – downsizing calculations

PDF The draft clauses dealing with the downsizing element of the new RNRB are out today.

The RNRB is available from 6 April 2017 and the relief for downsizing or disposals will apply for deaths after that date where the disposal occurred on or after 8 July 2015.

So, working out, with the aid of a cold towel, what the calculations might actually mean is going to be important – particularly if this is potentially an area where not only the estate planning department need to know what they are talking about, but need to find a way of recording the information through the conveyancing department for most residential property sales that took place since the summer, where it is anticipated that the clients have a total estate value exceeding £650,000 (or £325,000 for non married persons).

I hope Professor Lesley King will do another talk with worked examples – that would help.

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Budget 2015 and initial thoughts.

Budget statement in pdf from Inland Revenue

Some of the things I think this means.

Terms:

Although this refers to a “main residence nil rate band” the personal representatives can elect for any property owned and lived in by the deceased to count as the residence for this purpose.  The term is not related to the main residence or Principal Private Residence.  Potentially, each spouse could have a separate private residence, therefore.

The residence nil rate band (which if someone else has not already labelled it thus, I shall call it the “RNRB”) can be transferred to a spouse and remain intact.  This applies no matter when the first death occurs, so long as the second death occurs after the start of the tax year 2017-18.

The RNRB might end up, therefore, also being called the TRNRB when claimed on the death of the second spouse. There will be new additional forms to complete in addition to the IHT402 and the IHT217.  There will need to be new evidential burdens to show that a recipient falls within the class of acceptable beneficiaries called “descendants”.

The NRB as we know and love it applies at the current rate until the tax year 2021-2 commences.  It applies to all transfers whether intervivos or on death.

The RNRB applies only where there is a residential property in which the deceased has resided (or the spouse of the deceased???) and where the “proceeds of sale of that property” or the property itself pass to a linear descendant of the deceased (or of the deceased’s former spouse??).  The bits in brackets are where I am less certain of the detail.  One thing is clear – the definition of what is considered “linear descendants” is different from the standard definition of “issue” or “bloodline” since it includes not only the usual adopted children and children of the bloodline but also step children and foster children.

Things I am not sure about:

I don’t understand quite how you can quantify the foster children – but perhaps it is possible to prove that an individual is a foster child or has been one at any date.  Similarly, step children.  But then again, this gives an allowance for those children, rather than penalising them or giving them an entitlement.

I am not sure about the “proceeds of sale” aspect of things.  The Inland Revenue states that identifying what has been the proceeds of sale of a family home and making sure that there is a credit for this will be something that will be the subject of a consultation paper shortly.  Presumably, there is some paperwork required for Inheritance Tax purposes on the sale of a family home – so where downsizing from any home worth less than £2,400,000 is potentially eligible for this – so as to preserve the relief on this home.  This will be something that all conveyancing solicitors will need to know about as well, since otherwise it would not be something that would be mentioned to the client.  Few clients associate the sale of their home with the need to consider how it fits in with estate planning.

Does this now mean that flexible life interest trusts now need to be altered so as to take account of this potential future relief?  A “FLIT” by which I mean a discretionary trust, subject to a prior life interest.  I think it does.  Because the whole flexibility of these relies on the discretionary trust *not* being an individual or descendant.  Time to review these I think, and adjust expectations and drafting accordingly.

I think the new legislation means that (at least initially) if you are worth £2.4 million or more, then this RNRB is useless to you.

I also think this means that if you are selling up so that you can free up capital to make potentially exempt transfers, then you have to weigh up carefully whether doing so means that you will lose out on the RNRB.  The RNRB *only* applies on death, and does not apply to PETS that become chargeable.  Worst case scenario is that you free up funds, give some away to your children and do not survive the seven years.  When I say “some”, I mean if you give away more than one Nil Rate Band’s worth of gifts.  So – PETs will have to be limited to below £325,000 for each individual donor if they are within 7 years of death, or statistically likely to be so.  Or in other words, there is no such limitation, but without advice on the pros and cons, the decision should not be taken without, for example, more seriously considering term life insurance, in the very least.

 

In conclusion:

Possibilities of legal involvement in people’s affairs seem to have increased.  And in a way that doesn’t seem right – why should the taxpayer be hemmed in at every turn?  Why not just increase the whole of the NRB to £500,000 each – and not have this extra complication?  What about those childless couples who want to leave their money to nieces and nephews?  Why is this budget not making it easier for the rich to pay tax, rather than harder for the middle income people to manage the burden of it?  This extra complexity just means more work for the civil servants, more bad luck for the childless, more work for lawyers, more fees for professional advice.   And the extra complexity is not actually needed – it doesn’t close any major loopholes or planning issues where “clever lawyers/accountants” have been finding “loopholes”.

Deed of Variation – getting it wrong, (S142 IHTA)

Deed of Variation – getting it wrong | Withersworldwide.

Referring to the recent case of Vaughan-Jones v Vaughan-Joneswhere a deed of variation was effected in the estate of the husband.  The will of the husband had left assets both to the wife and also to the children.  The amounts left to the children exceeded the Nil Rate Band, and therefore an immediate IHT liability arose on the death.  The deed of variation was completed less than a week before the deadline (before the 2nd anniversary of death) but most importantly, failed to contain the election for Inheritance Tax which arguably was the whole point of the document.

The election for Inheritance Tax is the part of the document that enables, for Inheritance Tax purposes, the deed to be considered as if it was the wish of the deceased, rather than the wish of those who actually inherit.  To fail to include that election makes the document pretty useless – “ineffective”.  The reported case permitted the court to rectify this omission.

The Wither’s article reveals, however, that in the process of arguing the case, it was revealed that the deed of variation was not entered into freely – that the widow (to whom all was transferred so as to secure the 100% spousal relief) and children had participated in the deed in order that the widow would later give the assets back to the children.

A key part of the legistation permitting the election is that it cannot apply where there is any associated financial bargain (or “consideration”) with the election:

142Alteration of dispositions taking effect on death.

(1)Where within the period of two years after a person’s death—

(a)any of the dipositions (whether effected by will, under the law relating to intestacy or otherwise) of the property comprised in his estate immediately before his death are varied, or

(b)the benefit conferred by any of those dispositions is disclaimed,

by an instrument in writing made by the persons or any of the persons who benefit or would benefit under the dispositions, this Act shall apply as if the variation had been effected by the deceased or, as the case may be, the disclaimed benefit had never been conferred.

[F1(2)Subsection (1) above shall not apply to a variation unless the instrument contains a statement, made by all the relevant persons, to the effect that they intend the subsection to apply to the variation.

(2A)For the purposes of subsection (2) above the relevant persons are—

(a)the person or persons making the instrument, and

(b)where the variation results in additional tax being payable, the personal representatives.

Personal representatives may decline to make a statement under subsection (2) above only if no, or no sufficient, assets are held by them in that capacity for discharging the additional tax.]

(3)Subsection (1) above shall not apply to a variation or disclaimer made for any consideration in money or money’s worth other than consideration consisting of the making, in respect of another of the dispositions, of a variation or disclaimer to which that subsection applies.

(4)Where a variation to which subsection (1) above applies results in property being held in trust for a person for a period which ends not more than two years after the death, this Act shall apply as if the disposition of the property that takes effect at the end of the period had had effect from the beginning of the period; but this subsection shall not affect the application of this Act in relation to any distribution or application of property occurring before that disposition takes effect.

(5)For the purposes of subsection (1) above the property comprised in a person’s estate includes any excluded property but not any property to which he is treated as entitled by virtue of section 49(1) above [F2or section 102 of the Finance Act 1986].

(6)Subsection (1) above applies whether or not the administration of the estate is complete or the property concerned has been distributed in accordance with the original dispositions.

(7)In the application of subsection (4) above to Scotland, property which is subject to a proper liferent shall be deemed to be held in trust for the liferenter.

Finance Act 1986 Sch. 19, para. 24,with effect from 18March 1986. 

Buying a house? Have you made a will?

In recent conversation with my colleague, we noted that few conveyancers [1] talk in any detail about whether a person has made a will or not. Few conveyancers actually talk about tenancy in common either. Of course it’s all there in the fine detail, somewhere in the terms of engagement, or in the closing letter that no-one really needs.

That makes sense – it’s stressful buying a house. Who needs to think about dying as well? And who can afford to make a will?

But hang on a minute – that house will be worth hundreds of thousands – the most valuable asset you own. And you either don’t know or don’t care what happens to its ownership when you die? Surely you should find out? Make a plan?

Well yes. And lets be honest, since there is no such thing as a common-law spouse, no such thing as automatically inheriting from your partner, or even automatic entitlement to all that your spouse (or civil partner) owned, it really should be looked into.

And second marriages with children on both sides? Yes! go make that will.

[1] (the sort of lawyer that deals with buying and selling houses here in the UK)

When William died he left £300,000 but his son never saw a penny: Why you must write a will | Daily Mail Online

When William died he left £300,000 but his son never saw a penny: Why you must write a will | Daily Mail Online.

There’s a lot about this article that really rings true – and I don’t think that about most things that the DM publishes.

The terrible fact is that although most adults have home insurance and service their cars regularly, few have wills.  And really, the cost of a will might be far less than a car service in the short term, let along the longer term.

I still find it hard to understand why people can get married (which costs usually several thousands of pounds even for more modest arrangements) and not spend a few hundred pounds on sorting out their financial futures, now they are legally bound to each other.

With all the costs of a new house or a new baby, I can see why you might not want to spare the budget for doing your will in the short term as well – but thinking about how much I pay in childcare costs for after school club now, a will is less.  And there is absolutely nothing more important in my life than my child, whose future I want to take care of.  As for the new house – well, the smallest fraction of the purchase price could be set aside for a quick brush up of your will.

 

So – moving house might mean moving jobs, perhaps half way across the country, far away from your previous home and associates – meaning that the likelihood of your will being actually found diminishes, even if you made a will in the first place…  a good reason to update it, and also to register it with a service like Certainty.

 

Why does it have to be so much harder if a person dies without a will?  When it costs so little (compared to a night out in London, a car service, a new igadget,) to make it straightforward?

Wright and another v National Westminster Bank Plc [2014] EWHC 3158 (Ch)

Applying Pitt v Holt – Unilateral transaction — life death litigation.

I can’t find a publicly downloadable account of the judgment in this case, and this report does quote some of the detail.

The lesson being highlighted for practitioners is that the gift of something must be certain.

I wonder whether there was adequate advice on the part of the advisor assisting them with setting up an intervivos trust.   Perhaps it might have been part of the advisor’s targets to sell this sort of structure.

Perhaps even, there were detailed attendance notes of what was said when, and whether it appeared as if the clients understood that they could not have the income from what was given away, that a valuable source of income on a daily basis would be removed.  Hindsight has a terrible clarity, but surely that is the basis of any advice about giving up assets.  A clarity that this money is no longer yours, but you can watch over it.  With perhaps more care than you have done with your own assets, precisely because it belongs to another

 

Give Generously: why leave it to the taxman?

It is a truth universally acknowledged that a person with fortune must give some of that wealth to the government of the day.  But it is not necessary to do so with every appearance of enjoyment, and it is not a moral obligation, but a legal one.

Death and Taxation are two of the great certainties.  In the UK, we have a wealth tax that is calculated on the amount a person leaves when they die (Inheritance Tax).  This is in addition to the wealth tax that a person pays when they dispose of an asset that has increased in value (Capital Gains Tax) the wealth tax that a person is in the process of acquiring (Income Tax) and the wealth tax paid on the transfer of a property (Stamp Duty).

It might almost seem as if the money that a person makes, saves, invests and then finally dies owning has been taxed two or three times over before it can be passed on to one’s family.  The moral certainty about paying one’s fair dues can wear a little thin, in the circumstances.

If you are an individual and have assets exceeding £325,000, then there is a real possibility that you will be giving the taxman a large chunk of what you have worked hard for – everything over this amount will be taxed at 40%, unless it goes to an exempt person.  The figure of £325,000 is not an arbitrary sum – it is the amount that an individual can leave at 0% tax, and has been set for the next three tax years.

Happily, there are some ways of lowering an inheritance tax bill. Essentially, the basic way to reduce the tax is to be poorer by the time you die.  To spend so that there is less money, or give money whilst you still have many years to live, when your children can appreciate it.  By the time you die, your children might be well into middle age, and perhaps may have got past the difficult years.

The very basic patterns for giving are permitted by legislation – an annual amount per donor of £3000, together with small gifts that can be given, and gifts out of surplus income.  The one that people know best is the Potentially Exempt Transfer – this is where you give something away (completely, and do not keep any benefit from it) and if you survive that gift, it is out of your estate.  You are thus poorer when you die.  A direct gift is a potentially exempt transfer.

My uncle, now in his seventies, made a trust for the benefit of his children and grandchildren.  That trust fund was set up a few years ago, and is the means of providing for not only his daughter (who is not quite married but not quite divorced), his disabled granddaughter but also his able sons and grandsons.    By using the trust, he can retain control of the assets, to a certain extent, and make sure that the money is used in a way that truly benefits his grandchildren, rather than giving them too much money too young.  This also indirectly benefits his adult children, who have their lives lifted slightly, by knowing that there are some reserves for school expenses when times are tough.  And best of all, with luck, in a few more years, the amount put into the trust will have ceased to be counted as part of his estate planning strategy.  This latter sort of giving is not potentially exempt – but if kept within a single 0% band, is effectively without any lifetime Inheritance Tax to pay.

This is not a complete list of all the ways in which you can reduce your inheritance tax liability, and if you are planning to give away a substantial sum to lessen the inheritance tax burden, you are best advised by a professional, to make sure that your objective is achieved.  Your own situation is the most important to bear in mind, when giving, and your legal adviser can give a particular view based on your particular circumstances.

 

Auth comment:  yes, this was written to be a small article.  Now I look at it, I know it is not really a blog post.   Soz.