Inheritance Tax and the Main Residence Nil Rate Band

In his recent budget George Osborne announced that he plans to introduce a £1m nil rate band to fulfil a promise the Tories made some time ago.

However, it is not all it seems as the increase is going to be phased in over a number of years and the full £1m nil rate band will not fully come in until 2020/21 and then will only apply to married couples.

On top of that, the basic nil rate band is to be frozen at the current level of £325,000 until 2020/21. The new main residence relief will only apply to deaths after 5 April 2017 but, like the basic nil rate band, it will be transferable to your surviving spouse. After 5 April 2017 the starting relief will be £100,000 and will increase by £25,000 a year until the maximum relief of £175,000 is reached in 2020/21.

There will also be a tapered withdrawal of the additional relief where the total estate is more than £2m and no additional relief will be due at all if the Estate exceeds £2.7m after 2020/021.

The new relief will only apply to your main residence and will not apply to second homes. If you do own more than one property you can elect which property you wish to apply the new relief to.

The maximum relief can be preserved if you sell your home completely or downsize but the details of this will be the subject of detailed consultation over the next few months before the new rules come in after April 2017.

In order to obtain the relief the property will have to be left direct to your direct descendants, children and grandchildren. If you leave the property to other relatives such as parents, siblings, nephews and nieces then no relief will be due. If your Will leaves the property to your descendants via a Discretionary Trust rather than to them direct then again no relief will be obtained. You may need to review matters if your Will contains a Nil Rate Band Discretionary Trust and there is a possibility that this might involve part of your home.

As with most new legislation and new reliefs there is always an opportunity to take stock and see if there is anything that can be done to maximise the relief and this new relief is no exception.

So what should you be considering to ensure that you take full advantage of this new relief?

 

  • Review your Wills to see if these need updating. This is always a good idea but is now particularly appropriate if your Will includes a nil rate band discretionary trust and it is possible that your home may end up as an asset of the trust.

 

  • Is your total estate over £2m? You may therefore be subject to a restriction of the relief. If so consider making lifetime gifts to reduce the value of your overall estate.

 

  • The maximum additional relief for a married couple is going to be £350,000 but this will only be fully obtained if the house is valued at least this amount and you have other assets to utilise your basic nil rate band. If your house is valued at less than £350,000 and you do have other assets that take your joint Estate to over £1m should you be looking to upsize your property instead of downsizing which is what most couples consider doing. Upsizing your property from a £200,000 house to a £350,000 house could potentially reduce your inheritance tax bill by £60,000.

 

For further information on this subject please contact Robert Peel