The Summer 2015 Budget announced what appeared to be the increase of the Nil Rate Band for Inheritance Tax (IHT) to £1 million for spouses and civil partners.
In summary the new rules introduce a Residence Nil Rate Band (RNRB) in the sum of £175,000 which together with an individual’s Nil Rate Band of £325,000 gives them a total IHT allowance of £500,000 before IHT at the rate of 40% will apply. As with the existing Nil Rate Band on the death of a surviving spouse or civil partner, where the RNRB of the first to die was not used, it is possible to transfer this to the survivor’s estate so, together with the transferred Nil Rate Band, the total figure available on the second death is £1 million.
Interestingly, the RNRB can be transferred to the surviving spouse or civil partner’s estate even where the first to die did not actually own a residence. For the RNRB (and transferred RNRB) to be used on a death there must be a “qualifying residential interest”, which is a house that has been the person’s residence at some time during their ownership. If a deceased had more than one residence, it is possible for the personal representatives of the estate to elect which residence applies for the RNRB.
The Small Print
The Budget announcement was in line with the Conservative Party’s manifesto pledge of a £1 million IHT allowance but now that more of the detail has emerged it would appear that there are many limitations and complications relating to the new rules:
Did the RNRB come into force straight away?
No. The RNRB will only take effect from 6 April 2017 and at that time it will apply at the rate of £100,000 and will be increased each year by £25,000. It will therefore only reach £175,000 (or £350,000 between spouses and civil partners) in 2020/21.
Does it matter who the residence is left to?
Yes. In order for the RNRB to apply the residence of the deceased needs to be left to a “direct descendant”. This is defined as children, grandchildren, step-children and adopted children. The definitions since the original draft legislation was published have now been extended to also cover spouses and civil partners of lineal descendants, in addition to widows, widowers and surviving civil partners who have not remarried. This does therefore mean that the RNRB will not have any relevance to those who have no children or other direct descendants or who choose not to benefit them.
Will the RNRB apply to all estates?
No. The RNRB is restricted if the value of the estate exceeds a threshold of £2 million and in those estates a taper is applied to reduce the available RNRB. This means for deaths after 6 April 2017 the RNRB will be reduced to Nil where an estate is valued at £2.2 million or more.
What if the main residence has been sold prior to death?
At the time of the announcement of the RNRB, it was also made clear that legislation would subsequently be brought in to provide that where the RNRB or part of it might be lost because the deceased had downsized to a less valuable residence or had ceased to own a residence on or after 8 July 2015 then the RNRB would still be available provided the deceased left that smaller residence or assets of equivalent value to direct descendants. This further legislation has now been published in draft form but unfortunately the provisions are far from clear in their application. The legislation is subject to consultation so it is to be hoped clarity will be obtained. At the current time, however, queries remain as to whether it will be possible to make claims in respect of more than one downsizing and the evidence that will need to be submitted to HMRC.
Where does this leave testators?
Unfortunately, although the theory of the RNRB is good, in reality it is likely to provide limited financial benefit due to the conditions that need to be met and it looks likely to be overly complicated to deal with in practice. With some of the legislation not yet in its final form and given the new rules will not become effective until April 2017, there is still a great deal of uncertainty as to how it will apply. The preparation of Wills and wider estate planning should however now take into account these rules and it may be appropriate to make changes to maximise this additional relief.
For further information, please contact Alice Clewes, Partner at Hay & Kilner
Call: 0191 232 8345