Q&A: interest in possession and residence nil-rate band

In our regular Q&A series, Kiya Jacobs, tax advice consultant at Croner Taxwise, considers the residence nil rate band and inheritance tax issues when it comes to interest in possession

Q If I leave my main residence to a discretionary trust on my death for the benefit of my children, will I still benefit from the residential nil rate band?

A To benefit from the residence nil rate band you must leave your main residence to a direct descendant.

For the purpose of this threshold, the direct descendant of someone is a child, grandchild or other lineal descendant, a husband, wife or civil partner of a lineal descendant (including their widow, widower or surviving civil partner), a child who is, or was at any time, their step-child, their adopted child, a child who was fostered at any time by them, a child where they are appointed as a guardian or special guardian when the child is under 18. This does not include nephews, nieces, siblings and other relatives.

It must be left to them in the will of the person that has died, under the rules of intestacy or by some other legal means but does not have to be specifically mentioned in the persons will.

The legislation states that it also must be a ‘qualifying residential interest’ under section 8H (2) Inheritance Tax Act 1984 (IHTA 1984) and there would only ever be one ‘qualifying interest’ in an estate even if there is more than one property in the individual’s estate.  

If the property is in a trust when the individual dies, the only way they would still qualify is if it becomes part of the direct descendant’s estate after the person dies.

If the property is left in a discretionary trust it would not form part of the direct descendant’s estate, therefore it would not qualify for the additional nil rate band, so if the individual wishes to use a trust, they should take caution when deciding what type trust to use.

The direct descendant is not restricted on what they do with the property once they have inherited it.

About the author

Kiya Jacobs is a tax advice consultant at Croner Taxwise advice lines Tel: 0844 892 2470

This article first appeared on Croner Taxwise Library TQOTW: interest in possession & residence nil-rate band

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