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Technical View

Your Questions Answered


In this month’s Technical View we take a look at some of the recent queries received into the e-helpdesk. 

Hot topic – Residence Nil Rate Band


Question – I have a query regarding the Residence Nil Rate Band (RNRB) that is coming into effect from 2017. My client currently doesn’t own any property, and has a large amount of liquid assets that will form part of his estate for IHT purposes. He gifted the family residence to his daughter 20 years ago and has been paying her rent to live in it ever since. Given that he has a large IHT liability, I was wondering whether he could buy back the property from his daughter and so qualify for the RNRB when it passes back to her on his death. If he is able to do this, would he also be able to utilise his wife’s allowance (she passed away in 2014 when they did not own a residence)?

Answer – If the client purchased the property from their daughter, and then lived in the property as their main residence, it would qualify for the RNRB as long as the client survives until 06 April 2017 and the property passes to a direct descendant on death. With regards to utilising his wife’s allowance, the RNRB will be transferrable regardless of when the first spouse died. As long as the second spouse dies on or after 06 April 2017, both will qualify for the RNRB.

As a side note – if the client has gifted the house and is now living in it without paying the market value in rent, this may count as a gift with reservation.  It might be worth speaking to a tax adviser about this in more detail.  

Question – My client has his house going to his two children from a previous marriage in his will.  The current wife has right of abode until death or on remarriage.  The house is worth £550,000 and the remaining estate (which is left to the current wife) is £450,000.  Assuming my client dies first:-

  • Will the house qualify for the RNRB in future if the wife lives there but does not own it?
  • ‚ÄčIf the house were to go into trust for the children, how would this alter the outcome?

Answer – If a qualifying residential property interest is passed to a direct descendant of a life tenant (as in the situation with your client), this will still qualify for the RNRB. This is also the case if the property is then placed into trust for the direct descendants. It is important to note, however, that the direct descendants (in this case his children from his first marriage), would need to be the only beneficiaries of said trust. If the beneficiary pool were any wider, it could not be said that the property is being passed to direct descendants as the trustees would have discretion and it may end up being passed to one of the other beneficiaries. 

To clarify what constitutes a ‘qualifying residential property’ and what constitutes a ‘direct descendant’, please see our Technical View from September 2015 here.  

Taper Relief for chargeable lifetime transfer (CLT)

 

Question – My clients setup a policy under a discretionary gift trust. Both settlors have now died within the 7 year period and we are unsure whether taper relief applies as this is a chargeable lifetime transfer (CLT). When the gift was made it was below the nil rate band (£120,000 investment) - does this mean it no longer benefits from taper relief?

Answer – You are correct in that CLTs benefit from taper relief.  Taper relief can reduce the IHT payable on a failed gift where the donor survives the gift by between 3 and 7 years.  Note that taper relief only applies where the failed gift is subject to IHT in the first place.

For example, if Caroline gifted £200,000 to a discretionary trust (having made no previous gifts) on 1 March 2013 and she passed away on 30 April 2016, no IHT would be payable on the failed gift as it would fall within the nil rate band. The failed gift would use £200,000 of the nil rate band leaving £125,000 to set against the residual estate.

Caroline’s brother John made a gift of £400,000 to a discretionary trust (also having made no previous gifts) on 1 March 2012 and he passed away on 29 June 2016.  The first £325,000 of the failed gift will use the nil rate band in its entirety. The remaining £75,000 will be subject to IHT at 40%.  As the donor survived the gift by just over 4 years, taper relief can be used to reduce the IHT payable. This would be calculated as follows:

Gift of £400,000

£325,000 @ 0% (covered by nil rate band)
£75,000 @ 40% = £30,000 – (£30,000 x 40%)
IHT payable        =£18,000

Pension Tax Relief


Question – I have a client who has never claimed tax back on contributions made to his pension. He is a higher rate taxpayer. How many tax years can he go back and claim tax on his pension contributions?
 
Answer – There is a time limit of 4 years to claim back any tax relief from HMRC. A claim must be made within 4 years of the end of the tax year that an individual is claiming for. To make the claim, your client should contact HMRC noting relevant details including how much has been paid to the pension scheme, national insurance number, details of the pension scheme, details of the employer and the dates for which the claim is being made. 
 
If your client has an online account with HMRC it is possible to do this via the self-assessment tax return. 
 
More information (including contact details for HMRC) can be found by clicking here & here.

This note is to be used by Financial Advisers only. It is not intended for onward transmission to a private customer and should not be relied upon by any other person. Sanlam accepts no liability for any action taken or not taken by an individual or firm as a result of the contents of this material. The tax treatments and information contained in this document is based on current tax law and HMRC practice as at September 2016 and may be subject to change in the future. Whilst we have made every effort to ensure the accuracy of this material, we cannot accept responsibility for any consequence (financial or otherwise) arising from relying on it. This document is for information purposes only and should not be treated as advice and independent taxation advice should be always sought.
 
Past performance is no guarantee to future performance. The value of investments can fall as well as rise so investors could get back less than they invest.

Investing involves risk and the value of investments and the income from them may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.