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In 1979 Benjamin Franklin wrote “…in this world nothing can be certain, except death and taxes”. Inheritance tax combines both of those certainties being a tax payable when someone dies. However, there are allowances and reliefs available to reduce the inheritance tax burden such as the Nil Rate Band and the additional new Residential Nil Rate Band allowance.

Back in 2007 the Conservatives proposed an increase to the general Nil Rate Band to £1 million. Currently, everyone has a basic nil rate band of £325,000 and a married couple of civil partners have two nil rate bands, a total of £650,000.

Politicians are politicians and the Conservatives straight £1million has not come to fruition as the new Residential Nil Rate Band allowance is restricted to your main home and only comes into effect from April 2017, and then only on a tapered basis. Additionally there is to be further legislation in the Finance Act 2016 which could make further changes.

At this stage, therefore, it is only possible to set out the basic changes that will come into force albeit that the detail may be subject to further change. The current basic proposals, therefore are: –

The changes will come into effect in respect of deaths on or after 6 April 2017.
The amount of the Residential Nil Rate Band relief (in addition to the normal Nil Rate Band Relief of £325,000 or £650,000 for married/civil partnership couples) will be a further £175,000 per person or £350,000 for married or civil partnership couple.
A single person will have their Nil Rate Band Allowance of £325,000 plus a Residential Nil Rate Band allowance of an additional £175,000.
The tapered introduction of the relief from 6 April 2017 is as follows: –

£100,000 for 2017/18 per person (200,000 for married/civil partnership couple)
£125,004 2018/19 (£250,000 for married couple/civil partners)
£150,004 2019/2020 (£300,000 for married couple/civil partners)
£175,004 2020/221 (£350,000 for couple/civil partners)
The relief is restricted to residential property which is left on death to direct descendants. This means that if you have a more complicated arrangement relating to your main home in your Will then you may not qualify for the relief. Careful wording in your Will needs, therefore, to be considered and whilst the legislation remains not entirely clear and does not come into effect until April 2017 you would be well advised to consider leaving a specific gift to children/direct descendants of your main house in your Will so as to cover the position as much as possible.

In order not to discourage the sale of a main residential property because of the delay in the introduction of the new legislation until April 2017 it is proposed to allow the relief to apply prior to that date if the proceeds of sale are inherited by children/direct descendants. This applies in respect of disposals on or after 8 July 2015 and is designed to cover the situation where someone is downsizing or moves into residential care.

For those with an estate of more than £2 million the Residential Nil Rate Band will be tapered down by £1 for every £2 that the net value of the estate exceeds £2 million. Therefore those with estates of more than £2 million may want to reduce their estates below this figure in order to preserve a full residential enhancement, for example by making lifetime gifts. Very importantly the £2 million cut off figure for the Residential Nil Rate Band is calculated before any Allowances or Exemptions from inheritance tax. For example, the farming couple or a business couple eligible for Agricultural Property Relief or Business Property relief where the relievable farmland or shares in a trading company worth £2 million and a house worth £350,000 plus £650,000 of other taxable assets will lose the Residential Nil Rate Band (albeit that they will have the reliefs and the normal Nil Rate Band Relief of £650,000).

Is this well thought through legislation? Clearly there is a benefit to be had where a reduction in inheritance tax occurs as there could be a 40% saving (£140,000) as a result of the new Residential Nil Rate Band. However taxpayers with no children lose out. Taxpayers who rent property and have chosen to invest money in an investment portfolio or let properties lose out. The legislation itself clearly has uncertainties and complexities that will require a barrage of staff at HMRC to police, which in these austere times, will be costly and therefore one wonders whether it would have been a lot simpler merely to have increased the general Nil Rate Band allowance by £175,000 per person or £350,000 per married couple/civil partners in order to achieve the Conservatives original 2007 proposal of a Nil Rate Band of £1 million.

Needless to say the above complexities and uncertainties are such that any changes to Wills and other legal documents would require professional advice!

For more information or if you'd like to discuss your inheritance tax liabilities, please contact Ben Cooper on 01484 430 409 or at bencooper@eatonsmith.co.uk