Main Residence IHT Relief
Coming into effect on 6 April 2017 is a new Inheritance Tax (“IHT”) Nil Rate Band for main residences. Ultimately this allowance could save a couple up to £140,000 of tax, up to £80,000 of which arises ‘overnight’ on the day it is introduced.
Currently, the Nil Rate Band for an individual is £325,000 although any unused amount can be transferred to a surviving spouse to a maximum of £650,000.
Main Residence IHT Relief
The relief will apply where a residential property, which has been the individual’s residence at some point, is included in an individual’s estate and left to a direct descendant on death. ‘Direct descendant’ broadly means a child of the deceased (including step, adopted or foster children) or their lineal descendants, or spouses of the lineal descendants.
The enhanced relief is being introduced over 4 years as below:
- £100,000 for 2017/2018
- £125,000 for 2018/2019
- £150,000 for 2019/2020
- £175,000 for 2020/2021
Married couples are both entitled to the enhanced relief; therefore the maximum relief for a couple on 6 April 2020 will be £350,000, making a total of £1 million when combined with the maximum Nil Rate Band of £650,000.
This relief is worth a maximum of £140,000, being £350,000 at the Inheritance tax rate of 40%. The relief is reduced however where the estate is worth over £2 million.
To take a simple example, an unmarried individual passes away on 5 April 2017 and leaves the only asset in their estate – their home, worth say £450,000, to their child. As this individual is only entitled to a nil rate band of £325,000, the excess (£125,000) will be chargeable to Inheritance Tax at 40% being £50,000. If the same person passed away on 6 April 2017, then they would be entitled to the enhanced relief plus the nil rate band, making a total of £425,000 leaving a tax bill of only £10,000 being a saving of £40,000.
Under certain circumstances where an individual downsizes to a smaller property and the new property does not use up the whole main residence Nil Rate Band available, the balance of the relief may be applied to other assets left to direct descendants, subject to a number of conditions. This is known as ‘Downsizing Relief’ and it is potentially very valuable, although it is particularly complex.
In addition to these new tax reliefs, there are further tax savings ahead – the new £1,000 property income allowance and trading income allowance for individuals take effect this April, the corporation tax rate falls to 19% from 1 April 2017, the tax free childcare scheme is introduced this year and free childcare for 30 hours also comes into effect later this year. We will cover these reliefs in future Muras Matters.
This is a broad summary of a complex new tax relief, if you have questions on the above or for tax advice in general please contact our Tax Director, Jenny Marks.
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