The Penalty for Dying Childless (No Main Residence Allowance).

DairyQueen

OH and I are in the process of drafting new Wills. We will use a (STEP) solicitor but in the interim are discussing options that we believe could fulfil our wishes without incurring IHT.

I am childless so am unable to claim the main residence IHT allowance. My major beneficiaries will include my brother and his two (currently minor) children. OH has two adult children from a previous marriage and they will be the ultimate beneficiaries of the lion’s share of his estate.

I would be grateful if knowledgeable forum members could please comment on any obvious pitfalls in our draft plan outlined below.

We are in a fortunate position as we will have sufficient guaranteed retirement income by 2025 to provide a comfortable lifestyle with minimum/zero drawdown on our SIPPs. This also applies after the first death. From 2021 through 2025 we will frontload drawdown to bridge income and to fund treats in our active retirement years. Property equity will only be released to fund care home fees as a last resort for the survivor. We have no mortgage and no debts.

I have reduced life expectancy so Mr DQ is likely to be the survivor but, as with all things concerning mortality, nothing is certain.

Main Assets
Property: Current value £500k. Two small properties owned individually will soon be replaced by one, equivalent-value property owned as tenants in common 50/50.
SIPPS: £320k (OH) and £245k (Me). Estimated to reduce to £255k (OH) and £210k (me) by 2025.
Unwrapped assets: £120k+ split roughly between us.

Will – Me
- My 50% of property to nephews with a lifetime interest to spouse. My share of the property is currently worth less than the (£325k) IHT allowance but could breach it at some point in the future. I receive no main residence allowance so unclear what to do if my interest in the property ever exceeds the IHT allowance.
- All unwrapped assets to spouse. No IHT due.
- SIPP divided via expression of wishes between brother and cousins. Pensions outside the taxable estate and will be inherited free of IHT. No income tax payable by the beneficiaries if I die under age 75 (possible).

Will – OH
- Same arrangement as me on property but with OH’s daughters as ultimate beneficiaries. They will benefit from his main residence allowance so, from next year, he will have the additional £175k to add to his £325k IHT allowance.
- All unwrapped assets to spouse. No IHT due.
- SIPP divided via expression of wishes between me (spouse) and daughters. Tax as outlined above.

One pitfall we have discussed is the issue of care home fees. Neither of us wishes to be at the mercy of LA-funding and we can afford to self-fund. We therefore plan to be self-funded regardless of whether our spouse is still living. This means having sufficient assets in addition to the property in order to cover fees for one of us for up to four years. The SIPPs may be required to cover this but that size of annual withdrawal would incur hefty income tax. We have no clear idea of how to address this.

One final question if I may…

Between the first death and when the house is sold, what kind of tax liability would the ultimate beneficiaries of the trust incur on the first deceased’s 50% share of the property? For example, would any increase in the 50% share of the property held in trust incur CGT before the trust is wound-up?

Thank you for reading.

getmore4less

I am childless so am unable to claim the main residence IHT allowance. My major beneficiaries will include my brother and his two (currently minor) children. OH has two adult children from a previous marriage and they will be the ultimate beneficiaries of the lion’s share of his estate.

you need to update your understanding of the requirement to qualify for RNRB and who are included as direct descendants.

If married step children qualify.

https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm46034


It will be possible to utilise your residential nil rate band with careful structuring of finances and being married(civil partners).


If planning life interests then it is often essential to be married as if not there is no transferable nil rate band or spouse exemption and can significantly increase the tax burdon

if married the RNRB will be transferable

life interests(IPDI trust) are treated for tax as if the life tenant owned them so form part of their estate for IHT and CGT.

getmore4less

Following on from above....

Will – OH
- Same arrangement as me on property but with OH’s daughters as ultimate beneficiaries. They will benefit from his main residence allowance so, from next year, he will have the additional £175k to add to his £325k IHT allowance.

The way the life interests work if he dies and you become the life tenant then the RNRB rules are based on you not the OH.

The OH daughters would have to qualify as your direct decendants

DairyQueen

Thank you both for replying.

We married late in life and wish to ensure that my nephews and stepdaughters share our assets as equally as possible regardless of who dies first.

I was aware that my stepdaughters were defined as 'closely related' to me under the RNRB rules whilst my nephews are excluded from this definition. It's ironic that my stepd's are adult, independent and far less in need of my assets than are my two (minor) nephews. It's also ironic that my younger stepd's spouse could be considered more closely related to me than my own nephews.

It seems very unfair that those with children should benefit from a tax break denied the childless.

Anyway, less of my whinging. Am I correct in my understanding as follows... ?

If, under the scenario I describe, Mr DQ predeceases me then on my subsequent death his RNRB will be lost to his daughters and potentially they will also be liable for CGT on any increase in value on his share of the property during the period in which I had been a life tenant. I assume that in this instance I would still inherit his £325k nil rate band so total taxable assets on my death could not exceed £650k (including Mr DQ's share of the property) without paying IHT. The property is likely to make up most of this as we had planned this to be our asset of last resort.

If, OTOH, I predecease him then, on his death, he will be able to use his RNRB against the 50% of the property that his daughters inherit directly from him whilst my nephews will potentially be liable for CGT on any increase in value, accrued since my demise, on the 50% held in trust. However, OH would have a total IHT-free allowance of (£325k x 2) + £175k = ££825k to offset against 100% of the property value plus any other non-pension assets.

If this is the case then I hope the solicitor can suggest an alternative. Seems like a STEP solicitor is a necessity in our kind of situation.

getmore4less

Your understanding of how the life interest works is still wrong.

Read up the rules on IPDI trusts.

The regular NRB and RNRB remains transferable if not used.

If he dies first you get 2 RNRB to use against his share of the house that will go to your close relatives his kids.