Legislation was introduced in the Summer Finance Bill 2015, published in July, to provide for an additional main residence nil-rate band. Lesley King explains the inheritance tax implications.
Clause 9 of the Summer Finance Bill, published in July, contains provisions which will bring in an additional nil-rate band (NRB) for inheritance tax (IHT). New sections 8D-8M will be added to the Inheritance Tax Act 1984 (IHTA 1984). The Bill may undergo significant change before it receives royal assent, but at present, it is as follows.
(1) The new residence nil-rate allowance will only be available for people who die on or after 6 April 2017 with a ‘qualifying residential interest’ which is ‘closely inherited’. Anyone dying before that date misses out.
(2) Any unused residence nil-rate allowance can be carried forward to a surviving spouse or civil partner (section 8F of the IHTA 1984). An allowance is unused if a person dies before 6 April 2017, or dies without a ‘qualifying residential interest’, or without one which is ‘closely inherited’. As with the existing transferred NRB, the brought-forward residence nil-rate amount’ has to be claimed (see section 8L).
(3) A ‘qualifying residential interest’ is an interest in a dwelling house which has been the person’s residence at a time when the person’s estate included that, or any other interest, in the dwelling house (section 8H). Whether the property is a ‘residence’ will presumably be decided on the basis of the capital gains tax (CGT) main residence relief case law, but the allowance is not restricted to the main residence (personal representatives are given a power to select which residence of the deceased is to be taken when there is more than one). A property which was never a residence of the deceased, such as a buy-to-let property, will not qualify. There is no requirement that the property is to be occupied as a residence throughout the ownership period of the taxpayer, so if the deceased moves into a former buy-to-let property shortly before their death, the property will qualify.
The deceased’s cumulative total is irrelevant, so there is nothing to prevent someone who is approaching death from making large lifetime gifts to reduce their estate below the level of the taper threshold.
(4) ‘Closely inherited’ means that the interest must be inherited by a child or lineal descendant, so siblings, nephews and nieces do not count for this purpose. Many people think the restriction is unfair. However, it’s worth noting that the definition of a child (contained in section 8K) is very wide and includes step-children, foster children and natural children who have been adopted by a third party.
(5) ‘Inherited’ is defined in section 8J as a disposition effected by will, the intestacy rules or otherwise (presumably by survivorship). Property settled on death can be treated as inherited, but only if the property is held for the benefit of the lineal descendant as an immediate post-death interest, an interest treated as an interest in possession in a disabled person’s trust, or under section 71A or section 71D trusts. A discretionary trust is not good enough, even if all the beneficiaries are lineal descendants. Note that a typical grandparental settlement along the lines of ‘to my grandchildren contingent on reaching age …’ will not work. Very bizarrely, if the deceased gives a residence to a lineal descendant and, because of the reservation of benefit rules, the residence continues to be included in their estate for IHT purposes, the donee will be treated as inheriting the property.
(6) The value of the residence nil-rate amount will be £100,000 in 2017/18, rising by £25,000 each tax year until it reaches £175,000 in 2020/21. It will then increase in line with the consumer prices index (CPI) from 2021/22 onwards.
(7) There is a taper threshold (£2m until the end of 2020/21, when it will be increased by reference to the CPI). When the net value of an estate is more than the taper threshold, the residential allowance (made up of the deceased’s own allowance plus anything transferred from a predeceased spouse or civil partner) is withdrawn by £1 for every £2 that the value of the estate exceeds the threshold.
(8) The taper threshold is the value of the ‘estate’, which means that the value taken is before deduction of exemptions and reliefs.
(9) It is only the value of the estate which is relevant. The deceased’s cumulative total is irrelevant, so there is nothing to prevent someone who is approaching death from making large lifetime gifts to reduce their estate below the level of the taper threshold.
It’s a strange piece of legislation which seems to complicate IHT unduly. We have ended up with three NRBs, all with slightly different rules.
(10) The additional NRB will also be available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to the value of the additional NRB, are passed on death to direct descendants. Legislation in the Finance Bill 2016 will provide that the additional NRB will still be available, provided the deceased left that smaller residence, or assets of equivalent value, to direct descendants. The technical details of how the additional NRB will be enhanced to support those who have downsized or ceased to own their home will be the subject of a consultation to be published in September 2015 ahead of the draft Finance Bill 2016.
It’s a strange piece of legislation which seems to complicate IHT unduly. We have ended up with three NRBs, all with slightly different rules. There is:
(a) an ‘ordinary’ NRB, available for all life and death chargeable transfers on a ‘first come first served’ basis;
(b) a transferred NRB from a predeceased spouse or civil partner which can be set against IHT arising on the death of the survivor, including tax on failed potentially exempt transfers and any additional tax on an immediately chargeable lifetime transfer; and
(c) the new residential NRB, which is only available against tax on the death estate.
The other thing to be aware of is that the new residence NRB is not set against the gift of the residential property, but reduces the general charge to tax on the estate as a whole.