When calculating inheritance tax (IHT) on death, can executors claim the residence nil rate band (NRB) on a residence even though the main residence is owned by a discretionary trust? Writing for Taxation magazine’s Readers’ Forum, BKL tax consultant Terry Jordan responds to a reader’s query.
‘A’s main residence was transferred to a discretionary trust. The potential beneficiaries are A’s two elderly children. It was assumed A will not pay IHT on their death as the property is in the trust. This is not the case as it will fall under the gift with reservation of benefit rules as A is still staying in the property without paying market rent.
When calculating IHT on death, can the executors claim the residence nil rate band on A’s residence even though the main residence is owned by the trust?’ Query 20,083 – Locust.
Terry Jordan’s reply: Residence band(s) will not be available on A’s death.
‘In 2007 George Osborne, then shadow chancellor, said that the Conservatives would make the IHT nil-rate band (NRB) £1m and that is popularly supposed to have deterred Gordon Brown from calling an election that autumn. The Labour government introduced transferable NRBs with effect from 9 October 2007. When the Conservatives came to power in 2015 they introduced the residence NRB with effect from 6 April 2017 (which has risen to a current figure of £175,000). The relevant legislation is in IHTA 1984, s 8D to s 8M; only by adding two ordinary NRBs of £325,000 to two residence bands for married couples and civil partners do you get to the figure of £1m.
In simple terms, for the residence band(s) to be available a residence must be comprised in a deceased’s estate and the value must pass to a direct descendant. The latter term includes lineal descendants of the deceased, their spouses or civil partners, stepchildren, adopted children and – bizarrely in my opinion as they can number hundreds for an individual foster parent – foster children (s 8K). Recognising that the availability of the band(s) might deter people from moving, ‘downsizing’ provisions can apply where a residence was disposed of on or after 8 July 2015.
A transferred the main residence to a discretionary trust and has not paid market rent for continued occupation. Accordingly, its value will form part of A’s estate for IHT purposes under the gifts with reservation provisions in FA 1986. Accordingly, the first requirement is satisfied. Had A transferred the property to the two children outright rather than using a discretionary trust, the residence band(s) would have been available (subject to tapering if the value of A’s estate exceeded £2m). The problem here is that s 8J(6)(b) requires the property to have become comprised in the children’s IHT estates on the making of the disposal which was not the case. Accordingly, the residence band(s) will not be available on A’s demise.’
The full article is also available on the Taxation website.
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