Complicated family settings - the impact on Inheritance Tax and RNRB.

In today’s world, families are structured in ever more complicated ways. In turn, these often require more complicated wealth transfer planning to make sure that the needs of different family members can be met. When such planning involves the family home, this complexity spreads to ensuring that the Residential Nil Rate Band (RNRB) remains available.

Tapering of RNRB 

The RNRB is an additional nil rate band (worth up to £175,000.) It is available when a family home passes to direct descendants, which includes stepchildren and adopted children, but not to the children of co-habiting partners. As with the standard nil rate band, any unused RNRB from the earlier death of a spouse or civil partner can be claimed on the death of the second spouse. However, the RNRB will start to be tapered away for estates worth greater than £2 million and disappears completely once the value exceeds £2.35 million, increasing to £2.7 million where an unused RNRB can be claimed.

Where transfer planning has been made, it is not uncommon for the family home to pass on death, into trust, rather than passing directly to the children. Where the trust forms part of a direct descendant’s estate, then RNRB can still be claimed.

With many marriages now involving partners who have children from previous relationships, such couples may hold their home equally as tenants in common. In such circumstances, on the first death, half of the property can be transferred into a trust created by the will, giving the surviving partner the right to live for life (known as a life interest), in their deceased`s partners half of the home.

Upon their subsequent death the property then passes to the first partner’s children. In cases like these, there are no `unusual` Inheritance Tax outcomes and the executors of the estate on second death should be able to claim any first spouse`s unused RNRB. This can be used against their own share should it pass to direct descendants as well as the life interest as this will pass to their stepchildren.

Different rules for co-habiting couples

Unmarried couples cannot enjoy the same Inheritance Tax Planning benefits. This is because there is no spousal exemption on the creation of the life interest, with the loss of the RNRB, the property share held by the trust does not pass to direct descendants as the deceased partner`s children are not the survivor`s stepchildren.

The RNRB can result in as much as £140,000 can currently be saved in Inheritance Tax for a couple. Therefore, and where possible, it makes sense to make sure that the RNRB isn`t wasted. To achieve this, it is advisable for clients to share with their adviser how their family dynamics work and what intentions couples have in respect of the distribution of their combined wealth upon their passing, if this valuable but complex allowance is to be utilised.                

If you think you might be in this position or want to discuss the issues raised in this article, please contact your normal Dentons Wealth Independent Financial Adviser.