The Finance Bill (No. 2) 2015 contains what would appear on first blush to be a new inheritance tax break which would be a welcome relief to many, considering the freeze on inheritance tax nil rate band allowance for the last six years.
However, whilst the legislation is still in draft format and could therefore change before it becomes law later this year, the newspaper grabbing headlines that the legislation means that a couple can leave up to £1,000,000 before IHT at 40% becomes payable do need to be considered on an individual basis.
The intention of the Bill is to introduce a £175,000 nil rate band which will apply to the value of your main residence and will be in addition to your £325,000 personal nil rate band allowance. The effect is to suggest that an individual could leave up to £500,000 and a couple £1,000,000 before IHT becomes chargeable. However, the allowance will not be available until 2017/2018 when it will be introduced at a lower £100,000 level and then slowly increased by £25,000 per year until the full £175,000 is claimable in 2020/21.
This new allowance will also only be available when the deceased has left their property to 'direct descendants'. Direct descendants include children, grandchildren, step-children, adopted and foster children and, following a recent update to the draft Bill, now also includes a spouse or civil partner of a direct descendant or a surviving spouse or civil partner if they have not remarried or formed another civil partnership.
However, a Will which provides for your estate (including your interest in the property) to pass into a Discretionary Trust (even if the only beneficiaries are you children and grandchildren) may not qualify for the relief.
The amount of main residence nil rate band will also be reduced if the value of your combined estate exceeds £2,000,000. The allowance will taper by £1 for every £2 that your estate exceeds this sum, thus meaning that when the allowance is fully in force then it would not be available once the joint estate exceeds £2,700,000.
The relief can also only be claimed against a freehold or leasehold residence, and therefore unless your estate includes a property which you used, or intended to occupy as your home, (albeit provision has been made for those who have had to sell the property post 8th July 2015 in order to downsize or go into residential care), the main residence nil rate band cannot be claimed.
If the property value does not equal or exceed the amount of main residence nil rate band allowance then any 'unused' allowance' cannot be applied against the value of other assets comprised within the estate. An illustration would be a couple leaving their estates to their children have a property worth £300,000 and cash assets of £700,000. The maximum amount of residential nil rate band claimable would be £300,000 and the maximum amount of nil rate band claimable against the cash assets would be £650,000, leaving in this example £50,000 subject to Inheritance Tax.
We would suggest that as a result of the proposed legislation that individuals and couples should consider reviewing their Wills to ensure that as far as possible their estate will qualify for the allowance.