Gift of 'Residential Nil Rate Band'

Trusts Discussion
1

I am dealing with an Estate where the Testator makes a specific gift ‘of the Residential Nil Rate Band’ (undefined) upon trust to pay the income thereof to his wife until her death, remainder to his children in equal shares. The residuary estate passes to the trustees upon discretionary trusts

I am not aware that the expression ‘Residential Nil Rate Band’ is defined by statute, although, common usage would suggest that it was intended to mean the residential enhancement described in s8 IHTA 1984

To even be able to make a gift of the ‘RNRB’, I imagine that the residence would have to be ‘closely inherited’ by lineal descendants following the Testator’s death, out of which the ‘RNRB’ would have to be paid to the Trustees. The Will does not provide for a gift to lineal descendants on the Testator’s death at all – quite the contrary. The purported gift of the ‘RNRB’ is to trustees of a Life Interest Trust and the residuary estate passes to a Discretionary Trust. ‘RNRB’ is thus not available and the gift fails. I also take the view that the gift of the ‘RNRB’ to the LIT is void for uncertainty

Do others agree or am I missing a point?

2

I have no practical experience of what causes gifts in will to fail. That would be double underlined in red if I could.

Saying that, I thought I would write something down. So let’s make up some facts. If the “Residential Nil Rate Band” was defined as “£175,000 or such amount specified by s8D(5A) IHTA 1984 for the tax year of my death”, then it would seem to be a gift of a particular quantum (£175,000, absent further changes to s8D). That seems straightforward to me but this isn’t my area.

With this definition, the defined term just reflects a numerical amount. It makes no difference whether or not the conditions are met for extra IHT relief. In other words, in this silly made-up example, I don’t see it would make a difference if s8D was referred to or if, for some random reason, s536(1)(e) ITEPA 2003 was referred to.

So let’s change it a bit. Let’s say that the “Residential Nil Rate Band” was not used in the will but instead “residence nil-rate amount” was used with no further definition. Handily, those words are defined in s8D(4) IHTA 1984. Let’s say that is just defined as £175,000 (but see below why it is more complicated than that). Would it be reasonable to treat both phrased to mean the same thing? Someone might might say that the statutory words (i) use lower case, (ii) have a hypthen, and (iii) use “amount” rather than “band”. But I’d expect that a commuter on the Jubilee line would think that the two things were same (and that it must refer to the IHT threshold rather than a random EMI one as that has a close nexus to death and wills and stuff). Would a court think the same? I have no experience.

I say more complicated than that since, while the “residential enhancement” is £175,000, the statutorily defined residence nil-rate amount is the amount after any tapering. If the will said it was a gift of “my” RNRB then I think that would be clear that the intention was to vary the amount depending on the value of the deceased’s estate and, to me that would make me think that the intention was to use the £175,000 less taper. However, the use of “the” makes things more ambiguous because its not clear whether the £175,000 that people would normally think of should be tapered or not.

As mentioned, I could easily interpret the phase “gift of the Residential Nil Rate Band” as simply a numerical amount.

But I find it very hard to interpret “gift of the Residential Nil Rate Band” to mean (i) an amount, and (ii) that tax relief is available as I’d have to add lots more words - a “gift of the Residential Nil Rate Band [a numerical amount] provided that there is, or would be if my estate was large enough, a reduction in the amount of inheritance tax payable by the estate or any other person as a consequences of the calculation of “M” in s8A(2) IHTA 1984 included the residential nil-rate amount (that exceeds £0) determined in accordance with s8D(4) IHTA 1984.”

You’ve not mentioned what the instructions to the person drafting the will said. Would they be relevant? What if the deceased had said I want to make sure my wife has the maximum amount that she can then give onward to our kids after she dies and she transfers our houses to our kids?

I cannot comment as to whether this means the gift is void for uncertainty. That’s completely beyond my experience. But with my very inexperienced view of things, I would not be jumping to that conclusion.

3

There are a number of will-writing program suppliers who use this type of provision. I suggest the will-writer should be asked either to explain their understanding of the provision, or to seek guidance from their program provider. If the provider cannot provide a straight answer, I would be reluctant to recommend the use of such a provision, mindful that it is the will-writer who will suffer if they are using a provision they cannot sensibly explain.

It might be noted that everyone in the world has an IHT residence nil rate amount/band/whatever, which can only be used to offset any IHT liability on death if the relevant conditions are met. Accordingly, I would go along with Tigger’s analysis – that it is merely a way of defining the value to be transferred to the trustees upon life interest trust for the surviving spouse.

On the basis that the testator was a lay-person, I just wonder what they understood the effect of the clause to be.

Paul Saunders FCIB TEP

Independent Trust Consultant

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