In the run up to the 2010 election a great amount of hype was made about raising the IHT threshold to £1m.
Roll forward to the summer of 2015 and in his July Budget statement the then Chancellor George Osborne announced the introduction of the residence nil rate band (RNRB) which comes into effect next April.
The RNRB is a separate allowance which is available where a residence is passed to a direct descendent. The allowance will initially be introduced at £100,000, increasing by £25,000 per annum until it reaches £175,000 in the tax year 2020/21. As with the current nil rate band of £325,000, any unused proportion of the RNRB may be transferred to the surviving spouse, or civil partner, meaning that by 6 April 2020 the IHT threshold may be £1m per couple ((£325,000 + £175,000) x 2).
Whilst at first blush this would appear to be relatively simple there are a number of traps for the unwary, which include:
- The relief is withdrawn by £1 for every £2 where the estate exceeds £2m. For an individual it is therefore lost once the value of the estate reached £2.35m, or £2.7m for a surviving spouse. In determining the value of the estate Business Property and Agricultural Property Reliefs are ignored.
- The RNRB is only available on one property, where there is more than one property the personal representatives may nominate which is to benefit from the RNRB, however, the property must, at some point, have been the deceased’s residence.
- The legislation includes provisions allowing the RNRB to continue to apply in full in certain circumstances where one has downsized, providing the sale takes place after 8 July 2015. Where this applies the downsized property and assets with an equivalent value to the ‘lost’ RNRB must be left to direct descendants.
- Those wishing to rely in the downsizing provisions need to retain records of the sale proceeds received so that the ‘lost’ RNRB may be calculated.
- Any loans or mortgages secured against the property does not reduce its value for the purposes of calculating the RNRB.
Conclusion
Whilst the RNRB is good news for many taxpayers, there are a number of provisions to it which mean that it is unnecessarily complicated and the application of a £2m threshold and the fact that the property needs to be left to a direct decedent may mean that it has limited application.
Should you wish to discuss how this legislation may impact on your inheritance tax charge on death, or would advice on how we may assist you in mitigating your potential inheritance tax charge please do not hesitate to get in touch.