ADVERTORIAL: The residence nil rate band and estate planning

The introduction of the Residence Nil Rate Band (RNRB) on the 6 April 2017 is undoubtedly the most significant change we have seen to Inheritance Tax (IHT) legislation for almost a decade.

Many financial planners are only now getting to grips with the legislation and are considering how the RNRB will impact upon individual estates and IHT planning strategies.

This article specifically considers how the RNRB impacts and interacts with the use of Business Property Relief (BPR) based IHT planning – which can reduce an investor’s IHT liability in just two years. 

Many estates will be entitled to a RNRB if the individual dies after 5 April 2017. Not every estate will benefit however, as the RNRB will only be available where an interest in a qualifying property (or assets representing it under the downsizing provisions) is being left to lineal descendants on death.

However, not everybody has an interest in a qualifying property and not everybody has lineal descendants that they can leave the property interest to. Siblings, nephews and nieces are not included in the definition of a lineal descendent. 

This reminds me of a client I previously advised who for the purposes of this article, we will call Peter. Peter had accumulated significant assets during his lifetime and at the age of 70, was single with no children/grandchildren.

From an estate planning perspective, he wanted to leave the majority of his estate to his nieces and nephews, but had no motivation or desire to make lifetime gifts to them. He did see the merit in taking some IHT planning measures but did not want the planning to compromise his own financial position.

When I first met Peter, the introduction of the RNRB had not been mentioned, but of course as it transpires it is of no benefit to Peter anyway.

The estate planning that we put in place consisted of some charitable legacies and BPR investments. The charitable legacies were set at a level that provided a reduction in the IHT rate for Peter’s residual estate.

The BPR investments were favoured by Peter as they did not compromise his lifetime position, access was retained and they offered both relief from IHT after two years and investment diversification benefits. This flexibility of BPR investments could appeal to people in a similar position to Peter. 

For those that will benefit from the RNRB, their potential IHT position could have changed significantly post 5 April 2017.

Case study

Betty is a widow with a total estate value of £900,000. Her estate comprises of a house valued at £600,000, investments of £200,000 and cash of £100,000. Full transferable nil rate bands are available from Betty’s deceased husband’s estate and she plans to leave her estate to her adult children. The potential IHT liability of Betty’s estate is considered in table 1.

As the figures in table 1 show, Betty’s IHT liability reduces from £100,000 on the 5 of April 2017 to zero on the 6 April 2018. Of course what this example does not factor in is any potential growth in the value of Betty’s assets. This is where an IHT calculator, such as www.IHTcalculator.com, can provide assistance to financial planners.

This calculator enables a planner to input assumed growth rates for the value of the property, investments and cash. The calculator will then factor in the availability of the RNRB in order to show potential future IHT liabilities on the rising value of the estate.

For Betty, we have assumed a 5 per cent growth rate for her property and investments, and a 1% growth rate for her cash holdings. The calculator results are displayed in table 2.

The figures in table 2 show that based on the introduction of the Residence Nil Rate Band (RNRB) on the 6 April 2017 is undoubtedly the most significant change we have seen to Inheritance Tax (IHT) legislation for almost a decade.

Many financial planners are only now getting to grips with the legislation and are considering how the RNRB will impact upon individual estates and IHT planning strategies.

The figures in table 2 show that based on the assumed growth rates, the IHT liability on Betty’s estate is not fully extinguished, and from 2021 the IHT liability starts to rise again quickly.

A planner may take a prudent approach to preserving Betty’s estate and factor in some growth in assets over time. The flexibility of BPR investments could prove of benefit in such planning as an IHT efficient investment of capital could help to future proof the estate from potential IHT liabilities resulting from asset value growth. The level of BPR investment can be increased or decreased in the future to take into account actual growth rates experienced.

If an estate is increasing in value due to unspent income, it could also prove advantageous to use the gifts out of normal expenditure exemption. 

For large estates valued at over £2m, entitlement to the RNRB (and any transferable RNRB) will be tapered away by £1 for every £2 over £2m. The valuation is based on an individual’s estate immediately before death and includes all assets less liabilities. The valuation is performed before applying any exemptions or reliefs. This means that BPR qualifying shares will form part of the valued estate to determine whether the RNRB should be tapered.

There are, however, planning options that could make the use of BPR investments particularly attractive for high value estates. If you have a client that this may apply to, please do let us know as we can provide further case studies to aid you across a number of scenarios.

Summary

In summary, the introduction of the RNRB will provide a welcome boost to IHT free thresholds for some, but not all. The need for advice in this area has never been greater and estate planners will play a pivotal role in helping clients navigate through the complexity of the rules. This article has considered how the introduction of the RNRB impacts on and interacts with BPR based IHT planning.

The key benefits of BPR include simplicity, accessibility and speed. These features can help planners develop flexible IHT planning strategies that can cope well with changes in legislation and reliefs. It is likely that we will start to see more diversified planning strategies being adopted, with, for example, BPR investment being used more in conjunction with gift and trust based planning. 

Further education and case study-based training for the RNRB

After hearing positive feedback from advisers on their appetite to receive further education on the RNRB, our business development team are available to deliver case study based training to both individuals and teams to help them fully understand this topic.

We have developed a suite of case studies reflecting various client scenarios and planning with the RNRB. Every client will be unique however and the BDM team are available to speak to you about client specific situations, run workshops with your teams and work with you to develop your professional connections.

If you would like to find out more about TIME or book a training session with a member of our team please contact us on 020 7391 4747 or questions@time-investments.com

Sam Jermy is senior business development manager of Time Investments