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.

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 change significantly post 5 April 2017.

 

Case study 1 is a worked example of this in action:

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.

 

Table 1

Position on 05/04/17 Position on 06/04/2017 Position on 06/04/2018
Estate Value £900,000 £900,000 £900,000
Standard Nil Rate Bands £650,000 £650,000 £650,000
Residence Nil Rate Bands £0 £200,000 £250,000
Chargeable Estate £250,000 £50,000 £0
IHT Liability £100,000 £20,000 £0

 

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.

 

Visit www.IHTcalculator.com to find out the approximate IHT liability of your client’s estate

 

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

Table 2

Year Estate Value IHT Liability
2017/18 £900,000 £20,000
2018/19 £941,000 £16,400
2019/20 £984,010 £13,604
2020/21 £1,029,130 £11,652
2021/22 £1,076,465 £30,586
2022/23 £1,126,126 £42,451

 

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.

 

Case study 2 shows a worked example for a married couple:

Robert and Kate are a married couple that have a combined estate of £2.7m. If assets are equalised, both Robert and Kate will have an estate valued at £1.35m and will individually be under the taper threshold of £2m. If all assets are passed to the surviving spouse on first death however, the surviving spouse will have an estate valued at £2.7m (assuming no growth or additional planning). On second death, entitlement to an RNRB and transferable RNRB would be tapered away.

Planning measures can be put in place to help avoid this scenario occurring. Robert and Kate could make arrangements so that a proportion of assets pass down on first death rather than leaving everything to their surviving spouse. BPR investments feature in their planning as they can be passed down on first death free of IHT (providing they have been held for two years) and without using up any Nil Rate Bands. The BPR shares could pass into a discretionary trust on first death to maintain flexibility and access for the surviving spouse.

By locking in the IHT relief of BPR investments on first death and avoiding passing all assets to the surviving spouse, Robert and Kate can plan their affairs so that in the event of each of their deaths, their individual estates are valued under £2m. This planning provides the double benefit of securing IHT relief on a proportion of their assets and helps to preserve their entitlement to the RNRB.

Gifting assets away prior to death can also assist in reducing the value of an estate for the purposes of the taper threshold valuation. This is because the taper threshold valuation does not include any gifts (including chargeable transfers) that have been made prior to death.

BPR shares will be included in the valuation for the taper threshold and, in some circumstances, it may prove beneficial to gift BPR qualifying shares away after two years but prior to death. If someone gifts away BPR qualifying shares, the recipient must keep them as a going concern until the death of the donor if they want to keep the relief (to avoid an IHT charge should death occur within seven years of the gift). A transfer into a Discretionary Trust could be useful here as the Trustees could ensure that the BPR shares are retained.

 

Case study 3 shows how a transfer into Discretionary Trust can work:

To provide an example of this planning, Frank is single with an estate value of £2.35m. He intends to leave his estate to his children. Under advice, Frank invests £350,000 into BPR shares in May 2017 and then transfers the shares into a Discretionary Trust in July 2019 after two years of ownership. This planning has helped Frank secure IHT relief qualification on the BPR shares and also preserve his estates entitlement to the RNRB. This could result in up to 60% effective tax relief on the £350,000 invested. It is important however to consider all of the implications of such planning including loss of access when transferring to the Trust and also the wider tax implications such as Income Tax and Capital Gains Tax.

 

Summary

In summary, the introduction of the Residence Nil Rate Band 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 Business Property Relief 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 Residence Nil Rate Band

After receiving positive feedback from advisers following our initial RNRB workshops, there is an appetite for further education and support on the RNRB and the opportunities to help all their clients understand their estate planning needs.

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.

You can also find out more via our RNRB webinar on 17 May – register here.

 

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.

 

About TIME

TIME Investments is an award winning investment manager specialising in tax efficient investment solutions and long income property funds. Our mission is to create transparent investment opportunities that bring long lasting peace of mind to investors and their financial advisers by seeking stable performance and consistent liquidity. To do this we have established a culture that revolves around our clients, with our teams regularly going above and beyond to create an experience that we are proud of.

Our original IHT service holds a 21 year track record of successfully achieving IHT savings for our investors, with over 3,000 investors to date, of which over 1,000 have successfully achieved BPR and exited. We also manage two innovative open ended property funds, designed to deliver stable, predictable income. Combined we have over £600 million in assets under management and, with a nationwide business development team of 23, we are dedicated to supporting the adviser market.

 

Sam Jermy, Senior Business Development Manager

Sam joined TIME in 2014 and is responsible for relationships across the South East. Prior to joining TIME, Sam worked as a financial planner, providing wealth management and tax planning advice to clients of Sussex based law firms. Sam was awarded Chartered Financial Planner status in 2014 and also holds STEP and IMC accreditations.

 

Posted: 19/04/2017 Categories: News

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