Since 6 April 2017, the Residence Nil Rate Band (RNRB) has been available to testators who leave their share of their main residence to their descendants and offers them additional IHT mitigation options. In its simple terms, the RNRB does seem relatively straightforward, however it is complex in its detail and there are a number of difficulties and pitfalls. Unmarried couples in particular have several disadvantages compared to married couples and civil partners when it comes to applying the RNRB.
What disadvantages do unmarried couples have?
When it comes to IHT, unmarried couples do not have the benefits that married couples receive.
Unmarried couples do not benefit from the spousal exemption, meaning that if they leave assets to each other these will be chargeable if the estate is over the NRB. Furthermore, unmarried couples do not benefit from the rules that allow for an unused NRB and an unused RNRB to be transferred.
Unmarried couples are also disadvantaged in that the children of a deceased’s partner are not considered as descendants for RNRB purposes. The children of a deceased’s spouse or civil partner however are considered as descendants.
Married couples and civil partners can easily leave their share of the main residence to each other outright, or on life interest trusts for each other, and then to their children or other descendants knowing that it will be IHT free on first death and that both RNRBs can be applied on second death. Unmarried couples cannot benefit from this and if they leave the property to each other, or on life interest trusts for each other, it may be chargeable on first death and only one RNRB could be applied on second death.
What can be done?
Unfortunately, the RNRB rules are very much designed with married couples and civil partners in mind and there is no perfect solution that unmarried couples can use to achieve full benefit of the RNRB.
Unmarried clients could consider gifting a share in the main residence up to the value of the RNRB to their children on first death and leave the remainder to their partner. However, this approach would mean that the children would own a share of the property outright and puts the surviving partner’s ability to live in the property uninterrupted at risk. This could be from the children intentionally attempting to force a sale or alternatively from third parties, for example if any of the children divorce or go bankrupt.
For these purposes, we generally advise against leaving a share of the property to children on first death. However if the clients have a second property that could also qualify for the RNRB, for example a buy to let that they used to live in, they could consider gifting a share of this property to children on first death in order to benefit from the RNRB.
It is advisable recommending to unmarried clients that their estates could be distributed in a much more tax efficient manner, or perhaps even escape IHT altogether, if they were married or civil partners. Some clients may even consider marrying or forming a civil partnership to ensure that their estates are distributed in a more IHT friendly manner.