What’s Happening with Inheritance Tax?
06 December 2017
In 2010 the Conservative Party’s manifesto made the promise that they would raise the inheritance tax threshold to £1million to help people who wish to pass something on to their children. On 6 April 2017, the new main residence nil rate band allowance will came into effect. The new regime purports to fulfil that manifesto promise.
The Previous Inheritance Tax regime
The current law governing inheritance tax provides that every person has a ‘nil rate band’ allowance of £325,000 which is taxed at 0%. This means that each person has an inheritance tax free allowance of £325,000.
If you are married or in a civil partnership, any assets passing to the surviving spouse or civil partner on the first death will benefit from a spouse exemption and no inheritance tax will be payable. On the second death a ‘transferable nil rate band’ between spouses is available. This effectively means that a married couple or civil partnership has a nil rate band of £650,000. Subject to any other exemptions which may apply, all assets over the nil rate band will be subject to an inheritance tax charge of 40%.
The Residence Nil Rate Band
The new regime, which came into effect on 6 April 2017, provides for a new nil rate allowance meaning that each person will have an enhanced inheritance tax free allowance on their death in certain circumstances. The previous nil rate band allowance, as detailed above, in still in force but the residence nil rate band provides for an extra inheritance tax free amount.
The new enhanced nil rate band allowance is known as the residence nil rate band and will come into effect when a person leaves their main residence to a direct descent. This main residence nil rate band is being introduced in the following stages:
- £100,000 for deaths in the tax year 2017/18
- £125,000 for deaths in the tax year 2018/19
- £150,000 for deaths in the tax year 2019/20
- £175,000 for deaths in the tax year 2020/21
By April 2020 each person will have a nil rate band allowance of £325,000 plus a main residence nil rate band of £175,000, therefore providing each person with an inheritance tax free allowance of £500,000 providing that certain conditions are met. The main residence nil rate band is transferable on death, similar to the nil rate band allowance.
By April 2020, should a spouse or civil partner leave their entire estate to the surviving spouse or civil partner on first death, on the second death the survivor would have an inheritance tax allowance of £1million.
Have you considered? On the face of it the new inheritance tax regime seems to show that the Conservative Party has fulfilled their promise of increasing the inheritance tax threshold to £1million however the detail of new main residence nil rate bad is, as always, important.
The direct descendant requirement
The main residence relief will only apply where the main residence is inherited by a direct descent. A direct descent is defined as a child or grandchild and includes a step-child and an adopted child. If you do not have children and leave your main residence to siblings, nieces or nephews then the main residence nil rate band would not apply in such circumstances.
The direct inheritance requirement
The legislation provides that the main residence should be ‘directly’ inherited. The use of certain types of trust in your will means that your descendants do not directly inherit the residence and as such the main residence will not apply. If your will currently incorporates a trust structure and you wish to avail of the new allowance, you should consider reviewing your will.
The main residence requirement
The main residence relief is limited to property that has been the persons main residence at some stage in their lifetime, so it would not apply to investment property. In the event that there are two potentially qualifying properties, the personal representatives of the deceased would elect which one the main residence nil rate band will apply to. If the value of the property does not utilise all of the main residence nil rate band it will not be possible to carry across any unused allowance to another property.
The two million pound taper
The main residence relief allowance will be tapered for estates worth more than £2m.This means that there is a withdrawal of £1 of the main residence relief for every £2 you are over the £2million threshold.