07th July 2015
Summer Budget 2015
Changes to inheritance tax nil rate band The Summer Finance Bill 2015 will include provisions dealing with the following changes to the inheritance tax nil rate band.
The Summer Finance Bill 2015 will include provisions dealing with the following changes to the inheritance tax nil rate band.
The present inheritance tax nil rate band (£325,000) will remain fixed until 5th April 2021.
An additional nil rate band (the “main residence nil rate band”) will be given where a residence is passed on to direct descendants. This will apply only to:
- a residence passing on death (it will not apply to gifts made less than 7 years before the death); and
- deaths occurring on or after 6th April 2017.
The main residence nil rate band will increase gradually, with the aim being that a couple with a house above £350,000 will eventually be able to leave £1million (between them) to their children/grandchildren. The levels will be:
- £100,000 in 2017-18
- £125,000 in 2018-19
- £150,000 in 2019-20
- £175,000 in 2020-21
- deceased must own an interest in a residential property which at some point had been their residence; and
- that interest is left to one or more of their direct descendants (not to e.g. a co-habitee)
- If the net estate (after liabilities but before reliefs and exemptions) is more than £2 million, then the main residence nil rate band will be reduced by £1 for every £2 that the net value exceeds £2 million.
- The interest in a residential property will be restricted to one property. If the deceased owned more than one property at death, in both of which he had resided at some time, his executors can choose which property will attract the main residence nil rate band.
- A direct descendant means a child (including a step-child, adopted child or foster child) of the deceased and lineal descendants of any such child.
- On the second death of a married couple or civil partnership a claim can be made to transfer any unused main residence nil rate band - in the same way that the existing nil rate band can be transferred.
- “residence/residential property” are not defined, but it seems likely that this will follow the legislation and case law in relation to the principal private residence exemption for capital gains tax.
There will be a consultation with a view to legislation being included in the Finance Bill 2016 to deal with downsizing. The intention is that the main residence nil rate band will be available where the deceased had downsized to a less valuable residence or had ceased to own a residence altogether after 8th July 2015. The main residence nil rate band should still be available if direct descendants inherit either the smaller residence, or “assets of equivalent value”.
It may seem unfair that the heirs of someone who has sold up to enter a nursing home before the Budget, will lose out on this new allowance. Unfortunately, there is always some cut off point – unless the consultation persuades a change on this point.
A number of questions spring to mind:
- What happens if the downsizing/sale of residence occurred before the first death?
- How fairly will the transferable main residence nil rate band work in a second marriage situation if the second member of a couple leaves the residence to his own descendants and nothing to the descendants of the first to die?
- How far will the actual proceeds of sale of a house have to be traced into the estate of the deceased? Will it be sufficient that the estate includes an amount equivalent to the net proceeds of sale of the property?
See our Tax and Trusts services page for more information.