Residence Nil Rate Band & Liftime Gifts of Property

February 24th, 2016

As the residence nil rate band (RNRB) will, in most cases, only be available where the estate includes a qualifying residence which is left to one or more individuals defined in legislation, it is clear that careful consideration will need to be given to the impact on the availability of any RNRB before proceeding with any planning strategies involving the family home. Here, in a series of three bulletins, we provide an analysis of the position for some of the more well-known planning options for the main residence, starting with lifetime gifts.

Planning with the main residence has become notoriously difficult over the last 10-15 years with the introduction of the pre-owned assets tax (POAT) and a tightening of the gift with reservation (GWR) rules. Nonetheless, for many, the main residence remains the most valuable asset in their estate and those with few other liquid assets have continued to explore and implement schemes to mitigate the potential IHT liability on the main residence.

The introduction of the transferable nil rate band will have eliminated – or significantly reduced – the problem for some and the new residence nil rate band will help further. However, as the RNRB will, in most cases, only be available when a qualifying residential interest (broadly, an interest in property that has at some time during the period of ownership been occupied by the deceased as a residence) is ‘closely inherited’ (that is, in broad terms, inherited by direct descendants or their spouses/civil partners or qualifying trusts for these persons); it is clear that careful consideration will now need to be given to the continued viability of previously accepted planning techniques and strategies involving the family home.

Below, we provide a brief overview of some of the more well-known strategies involving gifts of the main residence and analyse the impact of the planning in each case on the availability or otherwise of the residence nil rate band.

  1. Lifetime gift of house to children, donor remains in rent-free occupation

Where a property is given to children (or to a trust) during lifetime, the donor/settlor remains in rent-free occupation and the new owners do not move in, this will be a gift with reservation. Consequently, this strategy will usually only be employed where there is other motivation for the planning (such as asset protection).

Impact of planning on availability of the RNRB – New section 8J(6) IHTA 1984 (inserted into IHTA 1984 by Finance (No.2) Act 2015) effectively provides that, where property which has been gifted during lifetime remains in the donor’s estate as property subject to a reservation, that property is capable of qualifying for the RNRB. The RNRB will be available in such cases where the original gift was an outright gift made to direct descendants (or their spouses) as in such cases the property is deemed to be inherited by the donee(s). A gift to a trust would not qualify for this treatment.

Where the RNRB cannot be claimed (because, perhaps, the house has been gifted to a trust rather than to children outright), it may nonetheless be possible for a surviving spouse who also owns a qualifying residence to claim an uplift in the RNRB available to the estate on second death under the transferable nil rate band rules. While in some cases the ‘additional’ nil rate band can be claimed to compensate for RNRB lost as a result of a disposal of a qualifying residence prior to death (see below), it would not be available in this situation because of the wording of section 8FB(1)(a) which provides that to qualify, ‘the person’s estate immediately before death must not include a residential property interest’.

  1. Lifetime gift of house to children, followed by payment of rent

Where a lifetime gift of the main residence is made, it will not be a gift with reservation if the donor continues to live there under a formal lease at a full market rent.

Impact of planning on availability of the RNRB – the lifetime gift itself will be a potentially exempt transfer (PET). Obviously the gift itself cannot qualify for the RNRB as this can only apply to the estate on death. However, the draft legislation included in Finance Bill 2016, compensates those who have disposed of their only residence prior to death (and so lost out on RNRB) with an ‘additional’ RNRB in certain cases. Generally speaking, the ‘addition’ will be available provided:

  • the disposal is made on or after 8 July 2015;
  • death occurs no earlier than 6 April 2017; and
  • assets of equivalent value to the ‘lost’ RNRB are ‘closely inherited’ (i.e. broadly left to direct descendants or their spouses – or to qualifying trusts for such persons – on death).

Consequently, the advantages of an IHT effective lifetime gift of a qualifying residence will need to be reassessed having regard to factors such as the value of the qualifying residence at the date of the gift, the life expectancy of the donor and the availability of other assets of equivalent value in the estate. This will be particularly important if there is any doubt that the donor will live for seven years as, unless the estate includes other assets that will be closely inherited (so that the ‘additional’ RNRB can be claimed), a failed PET coupled with the lost RNRB may result in more tax being payable than would have been payable had the gift not been made. This is a contrast to the current position where the donor would be no worse off for the failed PET.

  1. Gift with shared occupation

A lifetime gift of a proportionate share of the property to one of the children will be IHT effective if that child shares occupation with the donor and the donor continues to pay at least their retained proportion of the outgoings.

Impact of planning on availability of the RNRB – Clearly, a residence that is left to direct descendants in its entirety can qualify for RNRB, however RNRB can equally be claimed where an interest in a qualifying residence is closely inherited.. Provided therefore that the retained share is of sufficient value to utilise the RNRB, there will be no adverse consequences for such planning. Where the value of the retained share is significantly below the RNRB (which will be £100,000 when first introduced in 2017 and which will rise to £175,000 by April 2020), then the same considerations as outlined in 2. above will apply.

It is important to remember that this bulletin focuses specifically on the IHT considerations of making lifetime gifts of property and there may be other factors that make the planning prohibitive, such as the loss of the CGT main residence relief on ultimate sale of the property and/or loss of security of tenure.