Inheritance tax relief on homes

November 9, 2015

Inheritance tax is a tax levied on the value of a deceased’s assets at the date of their death and on some gifts made during their lifetime. A certain amount can be passed on tax-free and this is known as the “nil rate band”.

For the current tax year 2015/16, each individual is entitled to a nil rate band allowance of £325,000. The nil rate band has been set at this level since the 2009/10 tax year and, as announced in the summer Budget, it will remain frozen at that level until at least the 2020/21 tax year.

However, the Chancellor announced that there will be an additional allowance introduced to enable individuals to pass some or all of their main residence to their children or grandchildren on death without incurring a tax liability. The “main residence nil rate band” will take effect from 6 April 2017 in the sum of £100,000. This will increase by £25,000 each year until reaching £175,000. This would therefore give a total combined allowance for married couples of £1m.

The main residence nil rate band is available to set against the value of the deceased’s property, but only where that property is left to his or her direct descendants. Descendants will include a step-child, adopted child or foster child and their lineal descendants. The allowance is restricted to property that has been the residence of the deceased at some stage in their lifetime, so it would not apply to a buyto-let property. In the event that there are two potentially qualifying properties, the deceased’s personal representatives can elect which one the main residence nil rate band will attach. If the value of the property in question does not utilise all of the main residence nil rate band it will not be possible to carry across any unused allowance to another property. A consultation on this aspect of the new legislation is to be published in September 2015.The main residence nil rate band will not be available to everyone, as the allowance will be tapered for estates worth more than £2m.

Many people arrange their wills so that their property, or a share in it, passes into a trust set up for the benefit of descendants as opposed to passing to them outright. The legislation states that the main residence nil rate band will only apply to certain types of trusts. These include trusts where the descendant is treated as if they own the property themselves (e.g. a life interest trust), and trusts for minor descendants and those under the age of 25. Accordingly, if a discretionary trust is used, the allowance will be lost. As with the existing nil rate band, the main residence nil rate band will be transferable between spouses and civil partners where the second spouse or civil partner dies on or after 6 April 2017 irrespective of when the first spouse dies.

Whilst the introduction of the main residence nil rate band is a welcome change to the inheritance tax rules the devil is very much in the detail and the application of this allowance seems, at best, to be very complicated and potentially very confusing. It is to be hoped that the rules will be simplified in due course.

Please note that the content of this article is for information purposes only and further advice should be sought from a professional legal adviser before any action is taken.