MANAGING THE TAPER FOR ESTATES ABOVE £2 MILLION
This new allowance for Inheritance Tax is not due to come into effect until April 2017 but it will be a valuable relief, worth up to £140,000 of tax saving for couples after 2020. Needless to say there are complications and pitfalls to be avoided if full benefit is to be gained.
THE MAIN REQUIREMENTS ARE:
There is sufficient value in residential property to cover the allowance which starts at £100,000 in 2017, rising to £175,000 after April 2020.
There are complicated provisions allowing “downsizers” to benefit in certain circumstances
The property must have been lived in by the deceased
The property must be left to direct descendants, i.e. not even nephews and nieces.
It must be left to them outright or in simple forms of Trust not e.g. discretionary but interest-in-possession
Where the first of a couple has already died their RNRB can still be claimed by the survivor
Where the Estate is valued at more than £2 million the RNRB will be tapered away by £1 for every £2 of the excess.
Most of these requirements are not susceptible to planning but the taper provision may well be in several situations.
PLANNING
Giving assets away or putting them into Trust (perhaps using a Discounted Gift Trust in order to retain the income) will be worth considering, subject to considerations such as Capital Gains Tax, but care must always be taken to ensure that enough income and assets are still retained to cover all foreseeable eventualities right through to the second death. Where there is a pension fund this can provide a valuable “reserve” in an IHT-exempt form.
FIRST DEATH
The Will of the first to die could leave assets not outright to the survivor but in Trust for life and then to children, thus keeping the assets outside the survivor’s Estate.
If the Estate of the first of a couple to die will not exceed £2 million but that of the survivor is likely to, the Will of the first to die could make use of the RNRB rather than see both RNRBs “tapered away” at the second death. This might be by putting part of the deceased’s share of the family house into an interest-in-possession Trust for children with the survivor as one Trustee to maintain control.
Where there is no doubt that assets passing on the second death will exceed the threshold consideration might be given to trying to ensure that it will be available on the first death by restricting the proportion of family assets held by the spouse likely to die first.
EQUITY RELEASE
Where the house value is such that, whatever planning may have taken place for other assets, the Estate is likely to exceed £2 million consideration might be given to reducing its value by arranging a mortgage (probably through equity release) and giving away the capital released. This will not reduce the IHT bill in itself for seven years but it could bring the Estate value below £2 million and gain the benefit of one or two RNRBs.
This is quite costly as the interest rate charged on the loan is usually about 6% pa fixed for life. However, two factors may mitigate the cost:
The interest accumulates and is a deduction from the Estate for IHT so the net cost to successors is only 60% of that, i.e. about 3.6% pa.
The recipients of the gift will be able to make use of the capital themselves and even if they just use it to reduce their own mortgages they will be saving almost the same amount each year as the net cost above. Indeed, if interest rates on their mortgages rise, as is likely, there may even be an annual profit.
TIMING
As the RNRB is not coming into effect for another eight months there is a temptation to ignore it until then. However, there is a case for acting earlier, either by reviewing Wills or, if the Equity Release option is considered, by taking the loan and making the gifts earlier. That will improve the chances of outliving the 7-year period and getting the IHT saving on that as well as the RNRB benefit.