Married couples could potentially save £70,000 of inheritance tax by protecting your residential nil rate band. In this case, this is the residential nil rate band of the first person to die in a married couple or civil partnerships in the UK.
The residential nil rate band is unusually complicated as a piece of tax legislation. It gets reduced by £1 for every £2 when a person’s estate is over £2,000,000. If the second spouse dies with an estate of £2,350,000 you will lose that person’s whole residential nil rate band which is £175,000. The impact of that would be 40% of £175,000 which is more tax to pay. This means there will be a £70,000 of loss to the estate in additional inheritance tax.
It’s quite difficult to protect the second residential nil rate band of the surviving spouse. However, it is relatively straight forward to protect the residential nil rate band of the first person to die.
If in the Will the residential nil rate band of the first person to die is transferred to the surviving spouse, there is a risk of that person losing that RNRB as well. A lot of lawyers overlook this possibility of protecting the first person to die’s residential nil rate band because they are not tax planners, and this is a tax planning exercise.
When we are planning with our clients, we assess the estate when the first person dies. This happens after the clients have put the option into the Wills that we have done for them to protect the residential nil rate band. It’s important – this is done at the outset of writing the new Wills.
We assess the estate after the first spouse dies and we determine by projection if that estate is likely to grow to more than £2,350,000. If the answer is “yes”, we claim the first residential nil rate band using an immediate post-death interest trust (IPDI). Basically, the residential nil rate band is claimed, the allowance is placed into an immediate post-death interest trust. This is on behalf of the children and is therefore not in the surviving spouse's estate because it’s claimed on behalf of the children who are direct descendants.
Most lawyers are not aware that an IPDI can be put into place because the beneficiaries of this trust are direct descendants. Normally, the residential nil rate band has to be passed to direct descendants, but it can also be passed to a trust where the beneficiaries are direct descendants.
There may be some capital gains tax on the growth of the £175,000 inside of that IPDI trust over time – this will be significantly less than the inheritance tax that would be payable and the loss of that £70,000.
Effectively, there may be some capital gains tax while it’s still being held but it can be alleviated depending upon the number of children and grandchildren. As the beneficiaries of that IPDI are children and grandchildren who may not be taxpayers everybody has capital gains tax allowances however small they might be.
With this methodology you can save the estate more than £70,000 and it’s certainly worth considering but it needs to be written into the Wills when the estate planning is being done.
This is very advanced planning and requires experienced lawyers to deal with the issues that arise.
Call us if you believe this may be of use to you because you have a high value estate.