I have an estate where there are several properties gifted to the deceased’s two children and then residue to them as well. The gifts are silent on tax. There is also a LIT over another property for the benefit of the partner for their lifetime and then to the deceased’s children.
The tax on the LIT property was paid out of the estate (only £35k of cash in estate) along with the first instalment on the tax on the remaining properties.
The beneficiaries (who are also the two executors) have then agreed to pay the instalments on each of their properties.
The RNRB was applied to one of the daughter’s properties as deceased lived there during his lifetime. When apportioning the tax on each individual property, we deducted the RNRB against this property and then apportioned the net values to give the percentage of tax due on each.
HMRC are saying that the RNRB should be applied against the properties as a whole rather than reducing the value of one property and therefore the apportionment percentages have changed. My understanding was that whilst the RNRB is used against the estate as a whole to calculate the tax due, it is deducted from the relevant property when working out apportionments.
Is anyone able to advise whether HMRC are correct in their application?
I am inclined to HMRC’s view.
If, say, you have an aggregable trust fund, and a qualifying residential interest, whether in the estate or the trust fund, RNRB is deducted before the IHT is calculated, and the IHT then apportioned between the 2 titles in accordance with their “net” values. The benefit of the RNRB is thereby shared between the trust fund and the estate, regardless of which contains the qualifying residential property.
It therefore follows, to my mind, that any available RNRB is a general benefit and not attached to any particular asset.
In many respects this is counterintuitive, but then I believe RNRB is generally viewed as unnecessarily complicated and (at times) irrational. I will not say “illogical” as that often applies generally.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
I think HMRC’s view is supported by IHTA 1984 s 8D which provides for the chargeable estate (under s 4) to be first reduced by any RNRB and then reduced further by any NRB (s 8D(3)). There is nothing to support the view that the RNRB is somehow deductible against one or more residences within the death estate.
The phrase RNRB perhaps unfortunately suggests deductibility against one or more particular residences which however is incorrect.
I have a somewhat similar issue. I have a free estate passing to a spouse (which includes a property) and then 3 x life interest trusts (no property) which aggregate with the free estate. There is an IHT charge as the trusts’ values combined exceed decd’s NRB. I am unsure whether the executor for the decd can claim the RNRB in the circumstances (or if it actually applies automatically and so there is no choice) to reduce the IHT liability, which is borne 100% by the trusts in the circumstances. To me, it seems that the RNRB simply comes off the entire chargeable estate (free estate + agg trusts), followed by the NRB per usual. Anyone have any thoughts?
The property (ie residence) in the free estate passes to the surviving spouse and is thus not closely inherited and hence no RNRB applies.
The interests in possession involve no residence and hence no RNRB is in point.