In the Summer Budget the Government announced, as expected, an additional allowance (known as the Main Residence Nil Rate Band) which comes into play when a residence* passes on death to direct descendants.
On the face of it, the property does not even need to be in the UK and, helpfully, the definition of descendants is wide enough to cover stepchildren, adopted children and foster children.
Before the 2010 election there had been speculation that the Conservatives would increase the Nil Rate Band to £1,000,000 if they got into power, but the resulting hung Parliament and the state of the economy put an end to that! The new proposals will go some way to appeasing voters but will not benefit everyone, favouring instead those who have had children and who intend to leave them something from their estate.
A claim for the new allowance can be made for deaths occurring after 6th April 2017, and the bands which will apply are as follows:
- £100,000 in 2017 to 2018
- £125,000 in 2018 to 2019
- £150,000 in 2019 to 2020
- £175,000 in 2020 to 2021
The above bands will increase in line with the Consumer Price Index from 2021 onwards.
Interestingly the proposals state that the claim can be made on one residential property only but it would be possible to nominate which will qualify if there is more than one in an estate. This will be useful if the last property is worth less than the available exemption.
In the same way that the existing IHT allowance can be transferred from the estate of the first spouse to die, so too can this new allowance, no matter how long ago the death occurred.
Despite this generosity, the number of estates ‘making a contribution’ to Inheritance Tax is expected to be higher at the end of the decade than in any year between its introduction and 2014/15, so there is still a case for exploring steps to reduce liabilities.
For those owning more than £2 million of net assets there is a sting in the tail, and the allowance will be tapered away for anything over that amount. A case could perhaps be made for ‘deathbed’ gifts but it is too early to comment.
At present, all we have is the original press release and HMRC’s technical notes. Press comment has implied that ‘thousands will miss out unless they make this change’. Sensible professional executors know that, provided action is taken within two years of death, there are good opportunities to mitigate taxes. Admittedly, there is a risk that executors acting without professional advice may have a problem, so, as is often the case, professional advice can save money.
*Or if it has been sold, possibly a past residence, assuming there has been a change of address after 8th July 2015