James Rust
Private Client Solicitor
Each individual benefits from an inheritance tax-free Nil Rate Band (NRB) of £325,000. If you own your own property, and this is used as your primary residence, and you wish to leave this to lineal descendants such as children or grandchildren, you also benefit from a further inheritance tax-free Residential Nil Rate Band (RNRB) of up to £175,000.
These thresholds are transferrable between spouses, on the condition that the first spouse to die left their estate to the surviving spouse in its entirety. If the first spouse left cash gifts or gifts of significant value, then the remaining value of the thresholds is transferrable but not the full amount.
When deciding what to do with your Residuary Estate there are various options available, but there are also various tax implications that should be considered.
For example, if you decide to leave your Residuary Estate, which includes your main residence, to beneficiaries by way of a Discretionary Trust written into your Will then effectively, you are passing ownership of the property to the Trustees and not lineal descendants and as such you forfeit the benefit of the RNRB, reducing the amount of inheritance tax-free allowance available to your estate.
The same applies should you choose to specifically gift your property to a named individual with an age contingency, such as 21 or 25 years. The beneficiary does not have an immediate right to the property and as their interest cannot vest in them until they reach the specified age, the property is held in Trust by the Executors and Trustees of your Will, effectively passing ownership to them until the beneficiary reaches the specified age.
The result is the same as above, the tax-free RNRB is forfeited and the inheritance tax-free allowance available to your estate is reduced.
