So has the promised Conservative Party pledge in 2007 to make family homes, worth up to £1m, exempt from Inheritance Tax (IHT) come into fruition or was it simply a manifesto ploy to win votes?
The answer to this question isn’t straight-forward and there has been some movement on this pledge. After forming a majority Government in 2015, the Conservatives have introduced a Residence Nil Rate Band (RNRB) to apply from 6th April 2017.
A brief re-cap
However, before we explain the implications of this new RNRB let’s recap on what the existing IHT provisions are; at the moment IHT is payable at the rate of 40% on the value of your estate (on death) over the current Nil Rate Band (NRB) which is £325,000. There is an exemption for any part of your estate that passes to your spouse/civil partner or charity. However, if you do leave your estate to your spouse or civil partner, it is possible for your NRB to be transferred to your surviving spouse/civil partner which would mean, on their death, IHT is payable at 40% on the estate value over £650,000.
The last increase to the NRB was in April 2009 and, with the increase in house prices over this period, not only is this pledge long overdue but it is likely to apply to more families than ever before.
An additional amount of £100,000 RNRB will be available from the 6th April 2017 which will top up the existing NRB. The amount of RNRB will increase by £25,000 every year, so by 2021, a full RNRB of £175,000 will be available. An individual could therefore have a combined threshold of £500,000 and, as mentioned above, it is possible to transfer the NRB and RNRB between spouses and civil partners, so this change means up to £1m could be the new combined threshold at which IHT is payable.
Great news, I hear you say! But, and there is always a ‘but’ – there are some restrictions. The RNRB only applies if the deceased had a ‘residence’ at death or had a residence at some point since the 8th July 2015. We do not have full details of what is defined as a ‘residence’, but having lived in the property will be essential so an investment property, unfortunately, won’t count. Also, if a person has downsized it may be possible to claim the previous higher value property as the residence. Another key condition for qualifying for the RNRB is that the mentioned ‘residence’ must be inherited by ‘direct descendants’ of the deceased, defined as children, grandchildren, step children and adopted children. The definition will also extend to spouses and civil partners of these descendants.
There needs to be some careful consideration of passing your estate into trust on death as certain types of trust are not compatible with the new RNRB. The RNRB is also restricted if the value of the estate exceeds £2m so those with larger estates may see little or no benefit from these changes.
For some married couples or civil partners it will be possible to pass on £1m to their families without any IHT being paid but, for many, some careful planning will be needed to maximise the potential savings from this new legislation.
Watch this space!
With the changes to legislation still to be confirmed this is still very much a case of ‘watch this space’. We will, of course, bring you an update of any changes in relation to IHT and the implications to you as and when they happen.
If you would like to discuss the new IHT changes and how they might apply to you, please do not hesitate to contact us.