RNRB James Kessler Will 2, 13 edition

James Kessler provides for a RNRB fund on the second death, following a life interest for the spouse, in Will 2 of the 13 edition. A share of a qualifying residence goes into the fund absolutely to descendants on the second death. The amount of the share is such as is necessary to ensure the trust fund obtains the maximum benefit of the RNRB-and it follows so does the free estate of the surviving spouse. Therefore presumably if say the free estate could only use up 3/4 of the RNRB and brought forward allowance because its half share of the residence was insufficient, if the other half share was in the trust, then a share sufficient to use the other 1/4 would go into the RNRB fund. So far so good.

There are words in brackets “but so that the free estate of my Spouse should obtain the benefit of the RNRB in priority to the Trust Fund” which are optional. The note says if they are left out then the free estate and trust fund share the RNRB equally. “equally” is in italics. I should have thought the word should have been proportionately-as my understanding is the RNRB will simply reduce the iht on death and not attach to a particular share of a residence if split between the trust fund and the free estate. Therefore if the trust fund is half the size of the free estate, the trust fund pays 1/3 of the iht, and therefore it could be said will have the benefit of 1/3 only of the RNRB, regardless of the size of the share of the residence in the trust or free estate.

Do other members agree?

If the words in brackets are left in, I assume the iht is divided so that the total benefit of the RNRB attaches to the free estate, even if part of the RNRB arose from a share of the residence in the trust-is this correct? I wonder if HMRC will be bound by this when it comes to their tax calculations/interest etc?

Simon Northcott

Simon Northcott’s posting raises the interesting question of how the benefit of the Residence nil-rate band is to be shared between:

(1) the testator’s free estate and

(2) a trust under which the testator has a qualifying interest in possession (typically an IPDI arising on the prior death of the testator’s spouse) (“the trust fund”).

The question does not arise very often as:

  1. HMRC are not normally concerned with this, as they will receive the appropriate amount of IHT and will not normally care or enquire which fund it is paid out of.
  2. The answer does not matter to the beneficiaries unless:

a. the residuary beneficiaries of the free estate (who normally bear the tax on the estate) are different from
b. the beneficiaries of the trust fund.

There is not much guidance on this question in the IHTA. I think the answer, supported by implication by s.211 IHTA, is that IHT attributable to the property in the free estate should be borne by the free estate and IHT attributable to property in the trust fund should be borne by the trust fund. So (subject to the terms of the will and of the trust) the benefit of the RNRB should be enjoyed:

  • by the free estate only, if the free estate holds the only interest in the residence which makes the estate qualify for RNRB relief (typically where the free estate holds the residence and the trust fund does not)
  • by the trust fund only, if the trust fund holds the only interest in the residence which makes the estate qualify for RNRB relief (typically where the trust fund holds the residence and the free estate does not)

Simon’s question supposes:

  • the free estate and the trust fund both hold interests in the residence, typically because the residence was formerly held by spouses as tenants in common, and the share of the first to die passed to the trust fund
  • either interest would make the estate qualify for the RNRB, typically because both interests pass to children of the testator.

In this case I think the benefit of the RNRB should be shared equally between the two funds, even if the trust fund and the free estate are not of the same value overall.

This is different from the way that the general nil-rate band is shared between the two funds, but the relevant statutory provisions are different.

On this basis, the wording of will 2 of the 13th edition of my “Drafting Trusts and Will Trusts” is satisfactory. Though it should be possible to make the point clearer by splitting clause 7.2.5 into two sub-clauses.

Incidentally, on 6 September Mary Ashley and I are doing a Clarity Breakfast seminar on “Tax effective wills in plain English: can it be done?“; which may be a helpful perspective through which to approach RNRB drafting issues. In my book I suggest: “The Residence NRB should be abolished and replaced by an increase in the General NRB.” If only!

James Kessler QC

15 Old Square

Lincoln’s Inn

I assume the equal split of the iht proposed by James only applies if the value of the qualifying interests in the free estate and the trust fund are the same. However there are often circumstantial where perhaps the survivor has downsized and bought the cheaper replacement property from one fund or or in different proportions. In that instance presumably the benefit of the RNRB would likewise be apportioned between the two funds proportionate to the values of the respective qualifying residential interests.

I have not thought through how the downsizing relief would affect the equation if it was required to top up the RNRB.

Simon Northcott

Following on from my post of 22 April, and James Kessler’s of 21st, the following points arise:

  1. If the benefit of the RNRB is apportioned proportionate to the value of the qualifying residential interest (QRI) in each fund, how does this work if the life interest fund and free estate contain other assets? Do you apportion the iht between the 2 funds as usual ignoring the RNRB, and within the funds apportion between the QRI and other assets, and then apply the RNRB to the QRI in each fund proportionately?

  2. As James says, it appears possible to direct one fund or the other takes the benefit of the RNRB in priority.

  3. Does this the mean the same applies if a QRI is left subject to payment of iht, so it takes the benefit of the RNRB when calculating the iht attributable to it as well as a proportion of the normal NRB?

  4. How is the iht apportioned between two parts of residue containing a QRI where one part goes to lineal descendants and one does not? Does the part going to lineal descendants get the benefit of the RNRB and the part going to others not, or is the whole amount of iht, with the benefit of the partial claim to the RNRB, treated as an expense of the whole residue and apportioned on a proportionate basis as usual?

Simon Northcott

Further to my and James Kessler’s posts of 21 and 22 April, I was at a course today from which it is evident that there is disagreement about the question of apportioning the benefit of the RNRB. Some very eminent speakers consider it should be treated in the same way as the normal NRB, i.e. Apportioned between the free estate and life interest fund according to the values of the respective funds. This is very worrying, as where does that leave the rest of us, who are trying to advise on these provisions.

Simon Northcott

Thinking further about these posts, I suppose it is a question of whether the RNRB is a relief (so normally attaches to an asset) or an allowance (which applies proportionately to the whole chargeable estate - free estate, IPDIs and GWROBs).

The context within the Act and the language seems to suggest it is an allowance, even though it does depend on the existence of a particular asset. If it is, then in the situation of a life interest on the first death of a couple, to achieve the aim set out in James’s precedent, it would only be necessary to say the separate Residence Fund would be such share of the residence, and/or top up sum, as is needed to maximise the RNRB in respect of the iht estate on the second death. iht would then be apportioned between the relevant parts of the iht estate proportionately in the same way as applies to the normal NRB.

It will be informative how HMRC apportion the iht between the different parts of the iht estate when the RNRB is claimed, so perhaps any members who receive their first such assessments could share this with the forum.

Simon Northcott