Meet Eve, who wants her estate to be able to claim the full RNRB

Estate planning

Estate planning for clients whose estate exceeds the RNRB

Clients with an estate worth more than £2 million face a tapered residence nil-rate band (RNRB) allowance. This means that it will lose £1 of RNRB for every £2 that exceeds this £2 million threshold.

This planning scenario explains how Business Property Relief (BPR) can help to restore the RNRB for large estates as well as reducing the amount of IHT payable overall.

Remember, BPR won’t be right for everyone. It puts investor capital at risk and comes with other considerations. We cover the risks in more detail in this scenario.

About this planning scenario

This is a tax-planning scenario designed to help you build appropriate strategies for your clients.

Nothing here should be viewed as advice. Any suitability decisions should be based on a client’s objectives and needs, as well as their attitude and capacity for risk.

Advisers should consider the value of tax reliefs for a client and the impact of charges relevant to the product represented or any product chosen.

Meet Eve

Meet Eve, who wants her estate to be able to claim the full RNRB

Eve is 83. She is widowed, with two children and four grandchildren. Her estate is worth £2.4 million. Eve understands that her grandchildren should be able to make use of the RNRB when she passes away. The RNRB is an additional allowance of £175,000, on top of the £325,000 nil-rate band (NRB), that is assigned specifically to the value of the family home. As Eve inherited her husband’s estate when he died, her estate will benefit from two NRBs and two RNRBs.

However, the value of the RNRB is tapered for estates valued at more than £2 million. So Eve will lose £1 of her £350,000 RNRB for every £2 that her estate exceeds the taper threshold.

Eve’s adviser explains that the value of her estate is assessed on the day she dies, so lifetime planning could restore the value of the RNRB. Eve could set up a trust right now, which would immediately solve the RNRB problem. However, it would trigger a chargeable lifetime transfer at 20% above the NRB. Plus, further inheritance tax would be payable if Eve died within seven years. Therefore, Eve’s adviser suggests something different.

The adviser assesses Eve’s objectives, appetite for risk and capacity for loss and deems her suitable for an investment that qualifies for BPR. If a BPR-qualifying investment is held for two years and at the time of death, it can be left to beneficiaries free from inheritance tax.

BPR-qualifying portfolios invest in the shares of one or more unquoted or AIM-listed companies. They are higher risk investments than main-market listed equities, and the tax relief is designed to provide some compensation to investors for taking additional risk.

Eve’s adviser recommends she invests £400,000 in a BPR-qualifying portfolio. If she holds this for at least two years, it can be left to her grandchildren free from inheritance tax when she dies. The value of the portfolio will be taken into account when calculating the RNRB taper threshold. So Eve’s adviser recommends that after she has held the portfolio for two years, she settle it into a discretionary trust. This would immediately remove the value of her portfolio from her estate for the purpose of the RNRB taper test. At this point the portfolio would qualify for BPR, meaning no chargeable lifetime transfer should be payable.

When Eve dies, no further inheritance tax should be payable on the amount settled into trust, even if she dies within seven years – as long as the trust continues to hold the investment.

Settling BPR-qualifying shares into a discretionary trust after two years restores the value of the RNRB, as well as saving inheritance tax on the value of the investment.

Key risks

Eve’s adviser explains the risks

Eve’s adviser makes it clear to her that the value of a BPR-qualifying investment, and any income from it, can fall as well as rise. She may not get back the full amount she invests.

He also explains that BPR is assessed by HMRC on a case-by-case basis, and that this assessment happens when an estate makes a claim.

The ability to claim the relief will depend on the company or companies Eve invests in qualifying for BPR at the time the claim is made. Tax treatment will also depend on her personal circumstances, and tax legislation could change in the future.

Her adviser explains that the shares of unquoted and AIM-listed companies can be harder to sell than shares listed on the main market of the London Stock Exchange. Their share price may also be more volatile.

Get in touch with your local IHT expert to discuss this scenario

How it works

How it works in practice

Let’s see how it might look if Eve were to invest in the Octopus Inheritance Tax Service, a service that invests in the shares of one or more unquoted companies expected to qualify for Business Property Relief.

This comparison assumes no loss or gain on any of the investments, although fluctuations will apply in practice. It also doesn’t take into account the initial and ongoing fees and charges investors would why buying, selling or reinvesting which would also need to be considered. It’s important to remember that the risk profile of each portfolio, costs and any investment growth or losses are likely to differ.

Find out more about how the Octopus Inheritance Tax Service could help clients like Eve

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