In the year 2007
If you cast your mind back to 2007, you may remember the then Shadow Chancellor, George Osborne, announce that the Tories, if elected, would raise the inheritance tax (IHT) free threshold (otherwise known as the nil rate band) to one million pounds per individual. This promise made at the Conservative Party conference in 2007 worked to transform the party’s political fortunes.
A full eight years later
In his 2015 Summer Budget speech, George Osborne as Chancellor finally announced significant changes to IHT. Once again, reference to the one million pound tax free threshold was made and legislation has now been drafted. But rather than simply raising the tax free threshold for everyone, the measures introduce a new allowance called the ‘Residence Nil Rate Band’ that will only be available to some, and only in certain circumstances. Many will be excluded from benefiting from the new allowance and there are a multitude of pitfalls that could result in the inadvertent loss of the allowance.
We have summarised below some of the key points to be aware of:
- The standard nil rate band will continue to exist, however this will remain frozen at its current level of £325,000 until 2021.
- A new ‘Residence Nil Rate Band’ will be introduced from 6 April 2017. This is being phased in gradually between 6 April 2017 and 6 April 2020.
- The residence nil rate band will only be available to offset the value of the owner’s interest in a property which has at some point been used by the owner as a residence.
- It is also only available where the property owner dies after 6 April 2017 and their interest in the property is transferred to certain qualifying descendants. Qualifying descendants include children and grandchildren for example, but does not include nieces, nephews or even siblings.
- The combination of a standard nil rate band and a residence nil rate band could result in total IHT free allowances for an individual as follows:
- So, rather than £1m of IHT free allowance per individual, the total allowance will actually be £500,000 per individual, and it will take four years to reach that level. As each person within a married couple or civil partnership has their own set of allowances (and these are transferable to the surviving partner if unused on first death), the total nil rate band for a couple in 2020/21 could be the magic £1m! That is of course if all of the appropriate steps are taken to ensure the full set of nil rate bands are available.
- In general, to qualify for a residence nil rate band, the transfer of a property must be made on death and made outright to descendants. It is therefore important to ensure that wills are drafted in a manner that facilitates this. Passing an interest in the property into a discretionary will trust for example could exclude the estate from being able to claim a residence nil rate band.
- Where the value of an estate exceeds £2m in value at the time of death, the residence nil rate band will be reduced by £1 for every £2 over an estate value of £2m. The estate valuation for this purpose will include both personal assets and business interests. Bizarrely, this is the case, even if the business interest has no charge to IHT due to relief being available.
- Special provisions are being introduced to enable an estate to still claim a residence nil rate band where a property used as a residence has been sold prior to death. This could include a situation where somebody downsizes or moves into care.
IHT is a highly emotive subject and often used as a political football. It remains to be seen whether any further changes to the rules will be made in the run up to 6 April 2017.
What is certainly clear is that a great deal of complexity exists, and for many, the one million IHT myth may never actually turn into reality.
Swindells is always here to answer any questions you have. So please give us a call on 01825 76 33 66 or fill in the contact form.