Thank you gentlemen for your responses.
I am a layperson and the main reason for raising this subject was that, from my research on the internet, there seemed to be differing views as to whether or not such actions would result in the loss of the RNRB.
I have just discovered the following article by Professor Lesley King
and I have posted the relevant part below.
Issues with the residence nil-rate band
The residence nil-rate band (RNRB) has been with us for some time now, but it continues to throw up queries.
The Trust Discussion Forum had this question posted on 9 May 2019: “Am I correct in thinking that a will leaving a large pecuniary legacy to the deceased’s son with residue to surviving spouse will NOT attract RNRB, even if (1) the legacy exceeds £325,000 and (2) the bulk of the estate comprises the deceased’s house?”
Where, as here, there is a legacy to a child and the only asset from which the legacy can be paid is a residence, it may seem like hair-splitting to suggest that the child is not inheriting an interest in the residence, but I would put money on that being correct, for the following reasons.
Meaning of “inherited”
To obtain the RNRB, a residence or interest in a residence must be closely inherited. Section 8J (2) of the Finance (No. 2) Act 2015 says: “B inherits the property if there is a disposition of it (whether effected by will, under the law relating to intestacy or otherwise) to B”.
HM Revenue & Customs (HMRC) says in the Inheritance Tax Manual at IHTM46033 that there is no requirement for a residence left to lineal descendants to be retained. It can be sold by the personal representatives (PRs) so long as lineal descendants receive the sale proceeds.
Appropriations are not dispositions
The same paragraph of the manual makes it clear that HMRC does not regard an appropriation as a disposition. If PRs appropriate a residence or interest in a residence to lineal descendants in or towards satisfaction of a pecuniary legacy, the lineal descendant is taking as “by virtue of the PRs [sic] administrative powers, not directly under the terms of the will”.
Although lineal descendants will be regarded as inheriting where they end up with the proceeds of sale, this is where there is an initial disposition of the residence to them and not where the initial disposition is of a legacy which the PRs have funded by selling the residence.
HMRC also says in the Inheritance Tax Manual at IHTM46033
“Equally a gift in the deceased’s will directing the personal representatives to sell the deceased’s residence with the sale proceeds being paid to a direct descendant would be treated as the residence being closely inherited.”
If that path is chosen and all beneficiaries are direct descendants, what is best way forward to ensure conformity with the RNRB rules? I put forward the following options and ask for your comments, alternatives and advice.
1) The sale proceeds just become part of the residual estate then are distributed as a mixture of pecuniary amounts and percentage shares.
Eg: £50,000 each to A and B with the remainder being split 60% for C and 40% for D.
2) The pecuniary amounts paid directly from the sale proceeds, the remainder added to the residual estate and then distributed as % shares.
Eg: £50,000 each to A and B from sale, remainder + residual being split 60% for C and 40% for D
3) Treat the sale proceeds separately from the residual estate and distribute as a mixture of pecuniary amounts and percentage shares. The residual estate then distributed as % shares.
Eg: £50,000 each to A and B with the remainder being split 60% for C and 40% for D from sale proceeds. Residual estate split 60% for C and 40% for D.