Common Questions in our Inbox: PPTs and RNRB

Welcome to the third in a new series of articles from the SWW Technical Team; Common Questions in our Inbox. For this instalment let’s talk about one of the common will trusts – property protection trusts (PPT) and the residence nil rate band (RNRB).

As we set out in our last article, a PPT is designed to take the deceased’s share in the home and give someone else (known as the life tenant) a life interest in the property which will give them the protection of living in the property for the remainder of their lifetime or earlier if the trust specifies i.e. remarriage. It also ensures that if the survivor requires long-term care, at least half the property is preserved for the benefit of their beneficiaries (i.e., the children).

However, what is the relationship between this type of trust and the RNRB?

What is the RNRB?

This is an allowance to reduce any IHT payable if the testator is passing their residence to direct descendants on their death. The RNRB is currently set at £175,000 and this is in addition to the nil rate band (NRB) (currently at £325,000).

When is it available?

The RNRB is available where a person leaves a “qualifying residential interest” to direct lineal descendants. For a property to be a qualifying residential interest it must form part of their estate at death and must have been used by the deceased as a residence at some point during their period of ownership. It cannot be applied to a property that was bought as a buy-to-let.

Who is a direct descendant?

Direct lineal descendants include: –

• Children
• Grandchildren, great-grandchildren, or great-great-grandchildren and so on down the line
• Stepchildren
• Adopted children
• Foster children
• Children the deceased was the appointed guardian of
• A spouse of the direct descendant

It would not include nephews, nieces, siblings or other relatives that are not included in the above list.

How is the RNRB applied where the home is passing to lineal descendants and non-lineal descendants?

The RNRB is limited to the value of the share of the property that is being closely inherited by lineal descendants.

Example:

• The home is worth £400,000.
• The Will gifts 50% to nieces and 50% to children.

The value of the share of the home passing to the children is £200,000 therefore the full RNRB will be applied.

If the Will includes a PPT, will the RNRB apply?

This is where it becomes slightly complex.

On first death, where the deceased’s share in the property passes to a PPT, for IHT purposes the property is treated as passing to the life tenant of the trust i.e. spouse and not to the children who are due to benefit when the trust ends (direct descendants).

This means that although the children are named as the beneficiaries at the end of the trust period the first to die’s RNRB could not be applied on first death because their interest in the property passes into the trust for their spouse and not to their descendants.

When the life tenant dies, the trust comes to an end and passes the property to the children. As long as these are lineal descendants of the life tenant (and remember step-children count here) the RNRB will be available at that point.

The RNRB can be transferred but as with the ordinary NRB this is only possible between married couples and civil partners.

Is the application of the RNRB affected by including an age of inheritance?

It depends on the age condition, the beneficiary and when the age condition arises.

• An age condition under 25 for children and stepchildren immediately on death will qualify for RNRB as these are bereaved minors/young person’s trusts.
• An age condition for a child or stepchild over 25 is not a bereaved young person’s trust so RNRB won’t apply.
• An age condition following the end of another trust, for example a PPT, will not qualify for the RNRB.
• Age conditions for grandchildren or other descendants are relevant property trusts and RNRB won’t apply.

If the spouse and son are named as life tenants, can the RNRB be applied?

The RNRB can be applied to the share that is passing to the son only since he is a direct descendant.

Can the RNRB be applied to high value estates?

The residence nil rate band will start to taper away for an estate that is worth more than £2 million and will reduce by £1 for every £2 that the estate is worth more than the £2 million taper threshold. For these cases where the clients are a couple, we need to consider the value of their individual estates and look at alternative planning that might keep the second to die below the taper threshold and retain RNRB, e.g., NRB trust planning.

Have a question of your own for the SWW Technical Team*? Send it to us at [email protected] and where possible, we’ll advise.

*Technical advice is available only to full members of the SWW (MSWW^) and is provided by email only. For more information about accessing our technical advice service, please see here.