A.) For your client’s estate to qualify for the residence nil rate band there are certain criteria that need to be met.
Firstly, there usually needs to be a qualifying residential interest in their estate. A qualifying residential interest is defined in s8H IHTA 1984 as the following:
‘A “residential property interest”, in relation to a person, means an interest in a dwelling-house which has been the person’s residence at a time when the person’s estate included that, or any other, interest in the dwelling-house’.
HMRC guidance on this definition can be found at IHTM46011. As this property was your client’s main residence it seems this first condition is met.
Secondly the qualifying residential interest then needs to be closely inherited by a direct descendant. Direct descendant generally includes children or a remoter lineal descendant of the deceased like a grandchild or great grandchild etc. s8K IHTA 1984 does extend this to include step children, foster children and court appointed guardians. More information on who is classed as a direct descendant can be found here – IHTM46013.
For the residential interest to be considered closely inherited we would expect to see a direct descendant receiving a disposition from the deceased estate of this property. However, in your clients Will this interest is being inherited by the discretionary trust, not the direct descendants and so does not appear to meet this condition.
However, the trustees could take advantage of s144 IHTA 1984 here and appoint the property out of the trust within 2 years of death providing the Will allows for this. The effect of s144 is to treat the deceased as having made the transfer for IHT purposes meaning the residence nil rate band will become available.
Giving the direct descendants an absolute entitlement in this way may give rise to a CGT charge at market value for the trustees of the settlement. No relief under s260 TCGA 1992 will be available. The CGT implications will depend on if whether the appointment is made before or after the residue of the estate has been ascertained. If the appointment is made before the residue is ascertained, the children will be deemed to acquire the property at probate value and no chargeable gain will be triggered for the trustees. More information can be found on this in s62(4) TCGA 1992 and CG31430.
For guidance on the residence nil rate band, see Croner-i Tax-In-Depth 629-540. For guidance on the operation of s144 IHTA 1984, see Croner-i Tax-In-Depth 632-150.
