The Chancellor, George Osborne, announced significant changes to inheritance tax (‘IHT’) in his Budget on 8th July 2015. Amongst the announcements was an expected change to the operation of the nil-rate band on death.
The existing nil-rate band (which will now remain frozen at £325,000 until 2020/21 – previously it had been frozen until 2018) will be joined by an additional ‘main residence nil-rate band’, which will have effect for transfers occurring on a death on or after 6th April 2017.
In order to qualify for the additional nil-rate band, the deceased will have to leave an interest in a residential property, which forms part of their estate and has been their residence at some point, to one or more direct descendants on death. In this case, ‘direct descendants’ will mean a child (including a step-child, adopted child or foster child) of the deceased and their lineal descendants. The new nil-rate band will not apply to IHT payable as a result of lifetime transfers which become chargeable on death, nor will it apply to property that has never been the deceased’s residence.
If the additional nil rate band is available, it will be £100,000 for 2017/18, £125,000 for 2018/19, £150,000 for 2019/20 and £175,000 for 2020/21, and thereafter will increase in line with the Consumer Prices Index. Draft legislation will be introduced in Finance Bill 2016.
The following are points to note:
- The additional nil-rate band can only apply to one residential property, but Personal Representatives will be able to nominate which residential property should qualify if there is more than one in the estate.
- For estates with a net value in excess of £2 million (how this is calculated is not clear), the additional nil-rate band will gradually be tapered away, such that for 2017/18 it will be lost entirely for estates over £2.2 million.
- The unused proportion of the additional nil-rate band can be transferred to the surviving spouse or civil partner, in the same way as the existing nil-rate band.
- The additional nil-rate band will also be available when a person downsizes or ceases to own a home on or after 8th July 2015 and assets of an equivalent value are passed on death to direct descendants.
Wills containing ‘nil rate band trusts’ should be reviewed; they may need to be amended once the provisions become law (expected to be 6th April 2017).
For more information, please contact the partner having responsibility for your affairs, or any partner in the Private Client Department here.