A Property Protection Trust (PPT) can safeguard your home from care fees and ensure your children’s inheritance is protected.
However, a common question we receive at Opal Legal is:
“If I put my house in a trust, will I lose my tax-free inheritance allowance?”
The answer lies in the relationship between your Will and the Residence Nil Rate Band (RNRB).
What is the Residence Nil Rate Band?
The RNRB is an additional tax-free allowance used to reduce Inheritance Tax (IHT). It applies when you pass your family home (a “qualifying residential interest”) to your direct descendants.
- The Allowance: Currently set at £175,000 per person
- The Total: When added to the standard Nil Rate Band (£325,000), an individual can potentially leave up to £500,000 tax-free
- For Couples: Married couples and civil partners can combine their allowances, potentially leaving £1 million tax-free
Who Counts as a “Direct Descendant”?
To qualify for the RNRB, the property must be left to:
- Children, grandchildren, or great-grandchildren
- Stepchildren, adopted children, or foster children
- A spouse or civil partner of a direct descendant
Note: This does not include nephews, nieces, or siblings.
How Does a PPT Affect the RNRB?
This is where expert planning is essential. Because a PPT creates a Life Interest for a surviving partner, the law treats the tax position in two stages:
Stage 1: The First Death
When the first partner dies, their share of the home enters the PPT. For IHT purposes, the law treats that share as passing to the surviving spouse (the Life Tenant), not directly to the children.
- The Result: The RNRB cannot be used on the first death because the children have not inherited the property yet. However, this is usually beneficial, as the unused allowance can be transferred to the survivor to be used later.
Stage 2: The Second Death
When the surviving partner passes away, the trust ends, and the property typically passes to the children.
- The Result: As long as the final beneficiaries are direct descendants, the RNRB (including the transferred portion from the first spouse) can be applied at this stage.
Common Traps: Age Conditions and Tapering
While a PPT is highly effective, certain hidden rules can catch families off guard:
1. The “Age 25” Trap
If your Will states that your children or grandchildren can only inherit the house once they reach a certain age (for example, 25), you may lose the RNRB.
- Children / Step-children: Generally qualify if the age is 25 or under (under Bereaved Young Person rules)
- Grandchildren: If there is an age condition (such as reaching 21), the RNRB is usually lost because the gift is not absolute at the time of death
2. High-Value Estates (£2 Million Taper)
If your total estate is worth more than £2 million, the RNRB starts to taper away. For every £2 your estate exceeds the threshold, £1 of the allowance is lost.
For very high-value estates, alternative planning such as Nil Rate Band Discretionary Trusts may be required.
Why Professional Advice Matters
A Property Protection Trust is a powerful tool for ring-fencing your home against care costs and remarriage, but it must be drafted with the RNRB in mind to avoid an unnecessary tax bill.
At Opal Legal, we ensure your Will is structured to provide maximum protection while remaining as tax-efficient as possible.
Contact Our Specialist Team
If you have questions about how a PPT would work for your family, or if you are concerned about your current IHT exposure, speak to one of our expert will writers today.
- Call us: 01483 910 865
- Visit us: www.opallegal.co.uk
- Email us: hello@opallegal.co.uk
