JULY 2015 - Hang on Sloopy
I was going to make the title of this ‘Don’t die yet’ but then I remembered the words of the old song…In his recent 2015 Summer Budget, the Chancellor provided details of his proposals for an additional Inheritance Tax nil rate band where the estate at death includes a residence.
Prior to the detailed budget proposals, a number of commentators had criticised the Chancellors plans on the basis that they were likely to result in elderly people remaining in large expensive houses, when there was no need for them to do so, purely to obtain an Inheritance Tax advantage.
As we’ll see below however, the Chancellors proposals are quite clever.
Back to the title of the article however and the point here is that the proposed measures will not have effect unless an individual dies on or after 6 April 2017. There is no benefit for anyone who dies in the meantime.
A further restriction is that it will only be of benefit to individuals with direct descendants, that is children and grandchildren, who have an estate, including a main residence, and who have total assets above the current inheritance tax nil rate band of £325,000.
The relief does not apply to buy to let properties but only to a residence used by the individual. It is limited to one residential property but the executors will be able to nominate which should qualify where the deceased owned more than one residence.
As with many reliefs, this one is not being introduced with a big bang. It has been pre announced but will be introduced in stages: £100,000 for deaths after 5 April 2017; £125,000 for deaths after 5 April 2018; £150,000 for deaths after 5 April 2019 and finally the full £175,000 for deaths after 5 April 2020. Thereafter the band will increase in line with the consumer prices index. Like the £325,000 nil rate band, the additional nil rate band is transferrable to a surviving spouse. In other words, if, on the first death, no use was made of the additional nil rate band then, on the death of the surviving spouse, two additional nil rate bands will be available.
The big surprise in all of this is that it is not necessary for the residence to be owned at the date of death. The additional nil rate band is also available when an individual downsizes or ceases to own a home on or after 8 July 2015 and assets to an equivalent value, up to the value of the nil rate band, are passed on death to direct descendants. An example of this could be where an elderly parent sells their main residence, reinvests the proceeds in quoted shares and goes to live in a retirement home. If the shares are left to children and grandchildren on death then the additional nil rate band can be utilised against the shares, subject to the restriction noted above.
Another surprise is that some of the Chancellors political opponents said that these provisions would help very wealthy people. You can take your own view on very wealthy but the additional nil rate band will be withdrawn where an individual estate has a net value of more than £2million. The additional nil rate band will be withdrawn at a rate of £1 for every £2 over the £2million threshold.
To end on a chilly note, the existing £325,000 nil rate band is to remain frozen at this level until 5 April 2021.