Inheritance Tax Residence Nil Rate Band
Inheritance Tax (IHT) is payable on death at 40% on the value above £325,000 for individuals and £650,000 for married couples and for those in civil partnerships currently.
With the IHT threshold unchanged since April 2009 and with many properties rising in value substantially since then, more and more people could now well exceed this threshold.
In the summer 2015 budget George Osborne announced plans to increase the IHT Nil Rate Band to £1 million by 2020/21 by the introduction of a “Residence Nil Rate Band”.
The £1 million Nil Rate Band
The current Nil Rate Band of £325,000 will be supplemented by an additional Residence Nil Rate Band of £100,000 for deaths after 6th April 2017 rising by £25,000 a year to £175,000 from 6th April 2020. Thereafter, the combined Nil Rate Band for a married couple or those in a civil partnership will be up to £1 million, or £500,000 for individuals.
The Residential Nil Rate Band is available where a person’s property is passed on death to a child or “lineal descendant”. There are a number of conditions that must be met to ensure that the maximum benefit is received.
The Residence Nil Rate Band available will be restricted for lower value properties. Where the value of the person’s home is less than Residence Nil Rate Band available the amount will be restricted to the value of the home.
Where a person sells their property to move into a care home or to downsize, they will still benefit from the Residence Nil Rate Band based upon the value of their previous property. The full details of this provision are yet to be finalised and will be included in the Finance Act 2016.
Transferring the Residence Nil Rate Band
The current £325,000 Nil Rate Band can be transferred to a surviving spouse if it is not used on the first death to make a total of £650,000 available on the second death. This is the same for the Residence Nil Rate Band.
Where a person leaves their property to their surviving spouse the Residence Nil Rate Band will be transferred to the spouse on death. The transferred amount available will be the amount of the Residence Nil Rate Band available as at the date of the second death.
If a person dies before 6th April 2017 the maximum that can be transferred to a spouse or civil partner who then dies after 6th April 2017 will be £100,000.
Taper for larger estates
There is a taper applicable where a person’s estate exceeds £2m. The value of the estate is calculated as the gross estate less liabilities but does not include any IHT exemptions. The Residence Nil Rate Band will reduce by £1 for every £2 over £2m. A person who dies after 6th April 2020 whose spouse or civil partner pre-deceased them would receive the ordinary £650,000 Nil Rate Band and £350,000 Residence Nil Rate Band. If their estate at the date of their death was in excess of £2.7m they would only be entitled to the £650,000 ordinary Nil Rate Band.
Other important conditions
1. The property left to children must have been the person’s residence therefore the value of investment property cannot be used.
2. It is sufficient that the property was the person’s residence at some point and it does not matter if the property has been subsequently let. If the person has more than one residence an election can be made as to which property will be used.
3. As mentioned above, the Residence Nil Rate band will only apply where it is “closely inherited”. This is defined as “lineal descendants” i.e. children, grandchildren and so on. The legislation also includes step-children, foster children and children adopted away from their birth parents.
4. A person will still receive the Residence Nil Rate Band where they have a life interest in a trust containing their residence provided that that the property is “closely inherited”. This will not apply to discretionary trusts as the trust property in such a situation is not classified as falling within the person’s estate for IHT purposes.George Ide, News, Private Client