Wife (W) died in Feb with DT Will. Her estate approx. £800K. H survived and has sizeable estate himself - over/approx. £2m if include Ws £800K.
My initial thought was to appoint all but available NRB (£253K due to failed PETs) to H absolutely so leave a NRBDT with Ws half of main residence (£212,500) and cash top up of approx. £35K. Reason - so Hs estate more likely below £2m re: RNRB taper.
H said he is likely to sell/downsize in near future and is already looking.
I am now wondering if better option would be:
Appoint out Ws RNRB £175K of main residence to son now with NRBDT as above (£253K). NRBDT could then be used to buy new house (in full or part) so appreciation outside Hs estate. This would use Ws RNRB now so locked in. Likely no/little CGT as sale would be soon so, with NRBDT, reduces Hs IHT estate by £453K with good chance Hs estate stay below £2m.
But I am unsure of his entitlement to RNRB if, for example, he only owns £100K in the new property, would that be all the RNRB his estate would be entitled to? I believe he should be able to claim downsizing on his share of the current main residence - is that correct as I do not want to risk reducing his full RNRB.
While there is the option to not use main residence re: NRBDT and use cash/investments instead, the admin of the NRBDT would be easier with main residence.
In these circumstances the adviser has to rely on his crystal ball plus the input of some reasonably reliable assumptions. Exactly your strategy and the only missing fact is the life expectancy of H.
If £175k is an amount of value that H would otherwise intend to pass to his son under his Will then it makes a lot of sense to use s.144 to make an appointment to the son of an interest in the property worth that amount and to trim the DT down to the NRB amount by appointing the remaining balance to H. This would leave W with a chargeable estate of £175k covered by RNRB.
This is a better move than a lifetime gift by H to his son and a gift by Will to him might risk RNRB taper. The relief might be improved but might be reduced or abolished. It is in many ways an IHT bird in the hand.
Some comments:
1 s.144 only applies for IHT. If there is a chargeable gain exposure a s142 variation with s62(6) TCGA double reading back would postpone the taxable disposal until the entire house is sold.
2 there is likely to be a taxable capital gain on the son’s share when the house is sold. Deferring the variation to the last sensible moment will give a better guess at this prospective cost but an early variation will avoid the need to pay IHT. If H does not get on with downsizing this CGT cost on a future sale could be unpleasant.
3 RNRB will be available whether the variation gives the son an absolute interest or an IPDI. The latter would allow H to be a trustee, even a sole trustee, and retain some control over the sale. Who is liable to pay any CGT may affect its amount payable.
4 H’s Will needs to contain “closely inherited” dispositive provisions that secure maximum RNRB including downsizing allowance on his death.
The client needs to buy into the potential risk of the CGT cost, which would be avoided if H sold the entire property or retained it until his death and in the latter event might even avoid IHT on the gain element of the value by RNRB including TRNRB but subject to taper. H’s life expectancy is a factor because the further out IHT on H’s death can be reasonably predicted the more painful an early CGT sacrifice on a near term sale of the property will be.
Key point. Realistically and statistically H’s death charge is not distant. So great plan if downsizing appeals to H and the right place can be found. The CGT on any gain of the son may well be acceptable price of definitely diverting £175k from H’s eventual estate.
Thanks Jack - so RNRB downsizing available to H as his interest in current home exceeds £175K full RNRB, even if moves to new home and his share is then less than £175K?
The calculation is rather convoluted but if he sells his share of the house for more than £175k (which seems likely if it is worth £450k) and leaves his QRI, plus the difference if it is worth less, so that the total is “closely inherited” he will get RNRB equal to £175k.
IHTM4601-3 deal with the situation where there is a QRI in the death estate and 4604-6 where there is none. The examples are complicated by positing qualifying downsizing disposals occurring at a time when the relief was historically less than £175k. But on H’s disposal the “residential enhancement” will be £175k.
He will need to ensure that if he has a QRI in his death estate it is closely inherited. If it is worth more than £175k he will obtain maximum relief without downsizing addition. If he has none he needs to ensure that other assets of that maximum value are closely inherited. If his QRI is worth less he must ensure that the QRI and other assets to the value of £175k minus the QRI’s value (call this “the shortfall”) are both closely inherited. Assuming that his estate is worth at least £175k he can either ensure that his entire estate is closely inherited or leave any QRI plus a legacy not less than “the shortfall”, employing an equation, so that both are closely inherited.
The equation is RE minus QRI where RE is the lower of £175k (or the maximum relief if the law changes) and the sale proceeds on disposal and QRI is the value of any QRI in the death estate.