02/08/22
Advisors at CTT Group, like many professional estate planners, often help our clients to use discretionary trusts. However, this can interfere with applications for the Residence Nil Rate Band (RNRB).
On its surface, the RNRB may seem like a simple extension to the Inheritance Tax Nil Rate Band but that’s not the case. RNRB is not automatically received – it must be applied for – and there are limitations on when it’s granted.
Help your clients secure their RNRB claim whilst making the most of discretionary trusts with CTT’s Flexible Family Trust.
What is the Residence Nil Rate Band?
The Residence Nil Rate Band (RNRB) is an enhanced Inheritance Tax (IHT) allowance of up to £175,000 (for the current tax year) for someone leaving their main residence to their children or grandchildren. This allowance is in addition to the Nil Rate Band (currently £325,000 in 2022).
The RNRB is not automatic; instead, the individual’s estate at their date of death must satisfy the conditions outlined in the Inheritance Tax Act 1984. Broadly speaking, a deceased individual’s estate will qualify for the RNRB if it includes their home (or a share of it), which a direct descendant then inherits.
The Problem with RNRB and Discretionary Trusts
Very commonly, we will recommend a discretionary trust (or trusts) to receive an individual’s estate following their death. This provides numerous benefits, including (but not limited to) asset protection and tax efficiency. However, a discretionary trust does not qualify as a direct descendant.
Now, all is not lost if your client’s existing planning passes their estate to a discretionary trust or trusts. Trustees have the flexibility to satisfy the requirements for an RNRB claim. They can take action under S.144 Inheritance Tax Act 1984 to make an appointment within two years of death (provided a will or other testamentary disposition settles the trust).
However, what if the trustees do not know they can do this? What if they realise too late? This risk may, of course, be reduced simply by appointing a professional trustee. But we believe it’s best not left to chance!
CTT’s Solution
In our efforts to ensure our clients always receive the best advice and are not paying IHT unnecessarily, we have developed our discretionary trusts coordinated with the will. This means that our clients are not only provided with the benefits of a discretionary trust, but the drafting of the trust also provides for an RNRB claim in the event of the trustees not acting, therefore still enabling the clients to maximise their IHT allowances. This is all achieved in a single trust!
So, how is it done? Our Flexible Family Trust achieves an RNRB claim by carving out the relevant share of the estate within the discretionary trust itself. This creates a default position within a specified period, making an Immediate Post Death Interest (IPDI) in favour of the client’s direct descendants. (This is only if the trustees haven’t made a specific appointment on IPDI before this time.)
CTT has developed the Flexible Family Trust to pair perfectly with the RNRB, ensuring that your client’s entire estate can utilise the many benefits discretionary trusts offer in the most tax-efficient way.
For more information on our Flexible Family Trust then please get in touch.
Our modified discretionary trust also applies to our other trusts written within the will, such as the Discretionary Trust of Residue and NRB/RNRB Discretionary Trust.
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