Inheritance Tax briefing note
On the 1st October 2007 a fresh-faced George Osborne announced to the Conservative Party conference that a Conservative Government would raise the Inheritance Tax nil rate band from the then £300,000 to £1m. “We will take the family home out of Inheritance Tax” he boldly declared. That prompted Gordon Brown to pull the rug from under the Tories by announcing the transferable nil rate band which essentially gave a married couple or civil partners a double nil rate band – now worth £650,000.
Osborne’s plans were curtailed by having to get ‘into bed’ with the Liberal Democrats in 2010 but fast forward to July 2015 and, feeling the warm glow of a resounding victory in the May election, George was ready to announce the Residence nil rate band. Whilst Messrs Osborne, Cameron and Brown are fading into political history the Residence nil rate band (RNRB) will be upon us in April 2017.
What is the Residence nil rate band?
From 6th April 2017 the RNRB will be available where a residential property is inherited by direct descendants. The RNRB will be £100,000 rising by £25,000 per year until it reaches £175,000 in April 2020. When coupled with the nil rate band of £325,000 that will give an individual a total nil rate band of £500,000. A married couple of civil partners together will have a nil rate band of £1m.
The residence nil rate band is more complicated then perhaps originally envisaged by the former Chancellor. Some practical points to bear in mind are:
- It will only apply to transfers on death – if you gift a property to a child during your lifetime then the RNRB will not apply.
- A ‘direct descendant’ includes not only your children, grandchildren etc but also a step-child, adopted child and the widow/widower of a direct descendant.
- The RNRB is reduced by £1 for every £2 a person’s estate exceeds £2m on their death. So in April 2017 if your estate exceeds £2.2m then you will not benefit from the RNRB.
- Your Will does not need to include a specific gift of a residence to a direct descendant.
- There are saving provisions where a person has downsized or no longer owns a property, perhaps because they have moved into a care home.
It is important to review your Will in light of the forthcoming changes. The downsizing provisions in the legislation are particularly complex and it is important to keep careful records of the proceeds of sale. You may be able to take steps to avoid the risk of losing out on the residence nil rate band due to the tapering effect where your estate exceeds £2m.