Mark McLaughlin looks at when a qualifying property is ‘inherited’ and ‘closely inherited’ for inheritance tax residence nil rate band purposes.
The family home is the most valuable asset in the death estates of many individuals and could trap some homeowners in the inheritance tax (IHT) net.
Thankfully, a claim for the residence nil rate band (RNRB) is potentially available where the family home is ‘closely inherited’ (IHTA 1984, ss 8D-8M). The RNRB (£175,000 for 2021/22) is available to each joint owner (most commonly spouses or civil partners).
What does ‘inherited’ and ‘closely inherited’ mean in this context?
It’s yours!
A person inherits the property for RNRB purposes if there is a disposition of it to that person, whether effected under the deceased’s will, under the intestacy rules or otherwise (e.g. property passing by survivorship).
Generally, if the deceased’s property passes into trust on their death, the property is not treated as inherited. The same applies if the property was in an interest in possession trust immediately before the individual’s death. However, there are exceptions to this general rule where:
- the deceased’s property passes into an interest in possession trust on their death, in which the beneficiary is beneficially entitled to an immediate post-death interest or a disabled person’s interest; or
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the property becomes held for the beneficiary on the deceased’s death in a trust for bereaved minors trust or an age 18-to-25 trust.
In either case, the beneficiary must be a direct descendant.
What if the property was held in trust on the deceased’s death? The property is still ‘inherited’ for RNRB purposes if the deceased was beneficially entitled to an interest in possession, and on their death a beneficiary becomes beneficially entitled to it.
If the deceased had gifted the property during their lifetime, but it was still treated as forming part of their estate for IHT purposes under the ‘gifts with reservation’ anti-avoidance rules, a beneficiary would inherit the property if it became comprised in the beneficiary’s estate when the gift was made.
Close enough?
The qualifying property must be closely inherited for the RNRB to apply. This broadly means that the property must be inherited by a child of the deceased or by a remoter lineal descendant (e.g. a grandchild, great-grandchild, etc.). Also included is the spouse (or civil partner) of a lineal descendant as at the deceased’s death (or where the lineal descendant died before the deceased and their surviving spouse had not remarried as at the deceased’s death.
The categories of qualifying beneficiaries include more than just the natural children, grandchildren, etc., of the deceased. The RNRB rules extend the meaning of ‘child’ to include step-children, foster children and children for whom a person was appointed by a court order as a guardian or special guardian if that appointment took effect when the child was under age 18.
Out of reach
The RNRB rules refer to descendants; hence, if the residential property passes on death to the deceased’s parents, it is not closely inherited.
The same applies to property passing to the deceased’s brothers and sisters, nephews and nieces or other non-lineal descendants.
Practical tip
The deceased’s will does not necessarily need to make a specific legacy of a qualifying property to a lineal descendant. For example, if the property forms part of the deceased’s residuary estate and the residuary beneficiaries are the deceased’s son and daughter, the RNRB is potentially available (see HMRC’s Inheritance Tax manual at IHTM46014).
