Residence Nil Rate Band and property vesting in the remainderman on first death with a life interest trust

If we are drafting wills for clients where it would be beneficial to them to have the rnrb upon second death, we are drafting a lit over the half share of the property for spouse on first death protecting the asset for the children / grandchildren
What if we draft the LIT with no overriding powers and say to the children as shall survive me, but if they die before me to their children in equal shares. So all the children need to do is to survive the Testator to get a vested interest in the property upon first death.

First death H. both children survive H and W has a life interest in the property.
The LIT is drafted so that on first death it has vested in the children of the deceased and therefore if one of the remaindermen of the trust were to die before the life tenant it would track by then whatever their will or intestacy stated. Could this lose the RNRB upon the W death i.e if one of the children had died and left their share to say hubby?
If so for tax purposes are we better to draft the life interest on a contingent basis of the remaindermen having to survive the life tenant therefore in such a scenario that I have detailed it would then track to the grandchildren (the child could not leave to hubby but it would track back to the trust as they had not satisfied the contingency of outliving the life tenant?) and be a direct descendent of the first to die so satisfies the RNRB requirements?

Lynsey Bashforth
Bashforth Young Solicitor

It would not matter if the share of the deceased child went to his/her spouse (provided not remarried)/issue, as all of these are lineal dependants, but it could go to non-lineal descendants.

The statute requires that the remaindermen “become beneficially entitled to it” on the life tenant’s death. Although the child is dead, his/her estate does, so I would argue the requirement is satisfied. After all, the first to die did leave it to his/her child.

HMRC’s own guidance says “To be eligible for the RNRB, the home, or the share of it, must be left to a person’s direct descendants so that it becomes part of the beneficiary’s estate as a result of the person’s death”. Therefore this supports this view.

I can see there is room for argument, so perhaps the cautious approach is the right one until there is further guidance., but what are others doing?

Simon Northcott

I’m in agreement with you and I have had an email from a well known lecturer to say the same. However I have asked practical law and I think they are more cautious in the approach.

My feeling is though that if it vests and tracks though the estate of the child a lineal descendent then we should get the relief. I take your point on the spouse issue but if he/she had left to an unmarried partner then as you say it would not qualify for the relief. I do think HMRC would accept that this is the correct interpretation but like you say is it better to be cautious at the moment.

If so at what point would you recommend drafting that it vest on the life tenants death instead – i.e what level of assets. Client who have estates approaching the 650K limit or all clients. ?

Lynsey Bashforth
Bashforth Young Solicitor

If a child only has to survive the first spouse, then, as fellow forum members have said, that child will have a vested interest once the first parent dies. Consequently the gift the child receives on the death of the second spouse passes instead into their estate, and then onward according to their will/intestacy.

Old FLIT arrangements allowed one to consider whether this was ‘what the parents would have wanted’ and if not, use the overriding powers to correct matters ( diverting the gift away from the deceased child’s estate and passing it to their children so that the ‘wicked son-in-law’ did not receive it). Now of course the wish to secure the RNRB prevents a testator from including overriding powers which overhang the second death. No tidying up allowed!

I now tend to insert wording that requires the children to survive the second spouse to die in order to avoid the parents gifts going off on a ‘dog leg’ to a son- or daughter-in-law. My Wills favour the grandchildren in default of the couple’s own child surviving, which is what most folk want. The correct destination of the gift is seen as more important than the knowledge that if wicked son-in-law receives it, he will benefit from the RNRB. (Adding insult to perjury, as one of my friends says.)

Jill MacMahon
Thackray Williams LLP

Any client with whom you feel it appropriate to discuss the RNRB, and who wants a life interest trust on the first death, should probably have a trust in this form.

As I have said previously, the reason I do not like this form is that I have had numerous situations over the years when it has been really useful when all interests are vested, and equally much frustration and problems arise where they are not.

Now that s32 is widened, that is a way out of the conundrum which could be used if appropriate. I also intend to advise including overriding powers exercisable during the life tenant’s life, either covering all interests, or more usually covering only the reversionary interests (as clients normally want the life tenant to have certainty), so that this is another way to keep things more flexible, and even include an age contingency for all or part of a reversioner’s entitlement if appropriate.

Simon Northcott

I like it when it vests on first death as well to be honest and I do think that HMRC would view it as inheriting as it has to pay to the deceased’s child’s estate in the scenario that I was giving earlier.

Where we have drafted such trusts in the past year or so and we have drafted them to try and meet the requirements of the RNRB should we worry that they may not in such a remote a scenario occurring – i.e should we contact clients to redraft to the second death do you think – the death of the life tenant do you think? Most of mine thankfully in that time are drafting to vest on the second death but I was just wondering what your thoughts would be.
Lynsey Bashforth
Bashforth Young Solicitor

Reading Lindsey Bashforth’s comments, my concern would be the extent to
which it might be possible to limit the future retainer to advising only
on the RNRB aspect, mindful that it can affect other aspects of
inheritance planning.

I feel advisers would be less prone to criticism/attack if, when taking
the initial (or any subsequent) instructions, it was clearly pointed out
to the client that a change of circumstances could undermine their
planning/intentions, and that they should seek further advice at that
time. The offer of a retainer might (more safely) be limited to those
relationships where there is frequent/regular contact.

Paul Saunders

I always say to my clients that the advice given when drafting wills is limited to the situation relevant at the time of drafting and that a change in circumstances may warrant the need to update the wills or seek further advice and I also say that as a minimum people should review every three years.

I also make it clear that they are not instructing us upon a retainer to keep them informed on changes in law. It is for them to review the wills and seek the advice.

How would you interpret the initial point that I made. Would you see it as gift to lineal descendent?

Lynsey Bashforth
Bashforth Young Solicitor