Inheritance Tax
Enhanced Nil Rate Band
Background
The 2015 Summer Budget saw the inclusion of an extension to the Nil Rate Band (“NRB”) for Inheritance Tax (“IHT”), where the main residence is left to direct descendants of the deceased. The changes do however add significant complexity and not everyone will receive the full benefit.
Nil Rate Band
Currently the nil rate band for IHT is £325,000 per person and this has been unchanged since 5 April 2009. Where a spouse or civil partner pre-deceases their partner, any unused nil rate band may be passed to the survivor leading to a maximum total nil rate band on their eventual death of £650,000.
Main Residence extension
From 6 April 2017, a £100,000 extension will apply in addition to the nil rate band. This will apply when a main residence is passed on death to direct descendants such as a child or grandchild. The allowance will increase each year until it is worth £175,000 as detailed below:
| 2017/18 | £100,000 | |
| 2018/19 | £125,000 | |
| 2019/20 | £150,000 | |
| 2020/21 | £175,000 |
From 6 April 2021, the allowance will increase in line with inflation.
The allowance will be transferrable between spouses and civil partners in the same way as the nil rate band, irrespective of when the first death occurred, so that in April 2020 when combined with the nil rate band an individual will have total allowances of £500,000. Therefore, a married couple should be able to transfer a home worth up to £1 million to their children without incurring any IHT.
Prior to the changes, an unmarried individual owning only a home worth £425,000 who passes away on 5 April 2017 could incur an IHT liability of £40,000. If the same individual passed away on 6 April and left their home to their children then there would be no liability due, as a result of the main residence extension.
Downsizing
The new home allowance will also be available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value are passed on death to direct descendants. For example, an individual might choose to downsize from a home worth £200,000 to a home worth £100,000. They could still benefit from the maximum allowance of £175,000 in 2020/21 if they leave the home and £75,000 of other assets to direct descendants. This could be a way to inherit assets free of IHT where tax would be due previously, if used correctly.
It is not necessary to have a residence in the estate to qualify, if the deceased owned a residence which would have qualified and other assets are inherited by direct descendants then the additional allowance could apply.
Elections
Where the deceased owns more than one residence, then their personal representatives can nominate one after their death. Only properties which qualify as residences can receive an election and only one residence can be nominated. For example a rental property cannot qualify as a residence. It may be necessary to prove that a property was occupied as a residence.
Restrictions and criteria
The main restriction is that the allowance can only be used to gift the property to a direct descendent – a child or grandchild. This includes legal guardian relationships as well as step and adopted children and grandchildren.
An important point is that unmarried couples and single individuals cannot benefit from the full £1 million allowance and that the allowance only applies to qualifying residences. The allowance is also tapered down for estates worth over £2 million.
As part of these changes, the main Nil Rate Band of £325,000 is frozen until 2020/21. Therefore individuals with assets growing in value should ensure their estate is structured more tax efficiently. Now is an opportune time to revisit Wills and make any amendments necessary to take full benefit of the allowance and other IHT reliefs.
Some of the legislation containing these changes has yet to be enacted and may change before it receives Royal Asset to become law. If you want further details of the new allowance or you are concerned about your potential IHT liability generally please contact our Tax Director, Jenny Marks.
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