The introduction of a new inheritance tax free allowance of £175,000 per person, to be used against the family home, was widely reported as representing the promised allowance of £1 million per couple. Unfortunately, in many cases the taxpayer may miss out on this extra allowance due to the complexities of the proposed legislation.
The second Budget of 2015, following the Conservative success in May’s General Election, introduced some expected, and some unexpected, changes to the personal tax system. One of the most publicised changes was the introduction of a Main Residence Nil Rate Band (MRNRB) for inheritance tax (IHT) purposes, to be set against the value of the family home. This followed the Conservative’s manifesto promise that “You’ll be able to pass on up to £1 million per couple completely tax-free”. Unfortunately, this is not quite the case.
Each individual has an IHT free allowance, called the Nil Rate Band, of £325,000. IHT is charged at 40 per cent on any value in excess of the available Nil Rate Band, after deducting any applicable reliefs or exemptions.
The MRNRB will give each individual who dies after 6 April 2017 an additional allowance to be used against their home (or their interest in their home) provided they leave the property to their direct descendants. Any unused MRNRB will be transferrable between spouses or civil partners if it is unused on first death. In 2017/18 the MRNRB will be £100,000, rising incrementally to reach £175,000 in 2020-21 and in line with the Consumer Price Index thereafter.
It is proposed that the MRNRB should also apply if someone downsizes or ceases to own a home after 8 July 2015, and assets of an equivalent value are left to direct descendants. The Government plans to consult on the best way to implement this so we are yet to see any details.
However, the basic conditions for the MRNRB in the draft legislation mean that, despite the headlines, many could miss out on the benefits. For example:
- The property must be left to direct descendants, which includes children, step-children, adopted and foster children ie, not siblings, nieces/nephews, wider family members or friends.
- There is a tapered reduction of the MRNRB where an estate (before deducting any reliefs or exemptions) exceeds £2 million, with no MRNRB for estates worth more than £2.35 million. Those with valuable business or agricultural property, for example, may therefore find no MRNRB is available.
- The MRNRB can only be set against the net value of a property, which may mean little is available if there is a mortgage or equity release, even if the overall estate is valuable.
- The relief is assessed at each death, so if the first spouse to die has an estate exceeding £2.35 million they are not entitled to any MRNRB, and so it cannot be transferred to the surviving spouse. The survivor should, however, be able to claim their own MRNRB.
- Property left to a discretionary Will trust will have to rely on legislative provisions which, if exercised within two years of death, can re-direct eligible property to lineal descendants in order to secure the relief. There is, of course, no guarantee that these legislative provisions will still be in force at the time of death.
The July budget also extended the “freeze” on the standard Nil Rate Band until 2021 so those not eligible for the MRNRB could be in a worse position than before these changes.
Therefore, for those who thought they would no longer have an IHT liability, there may be disappointment. It has never been more important to have a well thought through estate plan, complete with an appropriate Will and supporting documentation, to ensure your assets can pass to your loved ones in a tax efficient manner.