The main residence nil rate band is potentially highly advantageous. However, many wills are drafted in a manner that will prevent the new relief from applying. With the correct drafting, it should be possible to obtain the maximum £1 million allowance whilst ensuring your intentions are still met.
It had long been the intention of the current Conservative government to increase the threshold at which inheritance tax is paid and it has to be said that the current threshold has not kept pace over the years, having been significantly outstripped by rising house values. This has resulted in a lot of households falling within the remit of inheritance tax who were never the focus of the legislation.
Talk was frequently of a tax free £1 million and potentially this is on the horizon now, however its introduction is a little – shall we say – creative.
Essentially, we all have a nil rate band of £325,000 and inheritance tax is only payable once this threshold has been exceeded. If it is not fully utilised by the first spouse to die because the estate has been left in full or in part to the surviving spouse, the latter’s estate will have the use of any unused nil rate band, i.e. potentially covering up to £650,000 of assets. This limit will stay in place until at least April 2020.
An additional ‘main residence nil rate band’ of £175,000 is being phased in from 6 April 2017, initially at £100,000 then increasing by £25,000 each year to reach £175,000 in April 2020. This is a valuable relief from tax as in the future an individual could benefit from a tax free threshold of £500,000. As for the nil rate band, it can be used by the surviving spouse to the extent that it has not been used by the first spouse to die. In this way, a couple could reach a tax free threshold of £1 million, as per the Government’s stated aim.
However, as always the devil is in the detail. Whereas the original nil rate band applies across the board, the new main residence nil rate band is limited to the home and to certain circumstances:
– The relief is only available on the value of the main residence.
– The main residence must pass to direct descendants, i.e. children, including adopted, fostered or step children, or other linear descendants.
– The transfer must be on death.
– To fully benefit from this relief the estate value needs to be no more than £2 million as the relief is tapered by £1 for every £2 that the estate exceeds £2 million.
The above conditions fit with the Government’s policy of trying to remove certain estates from the charge to inheritance tax where they never intended them to be caught, i.e. because of house prices rising, whilst ensuring those on the higher end of the scale will still be subject to inheritance tax in full.
Given the above, care needs to be taken in ensuring that the will utilises the new relief, as the examples below demonstrate.
Where the home is not passed down directly, typically where interim arrangements exist which constitute a trust having been made, the relief is lost unless the trust gives the child or grandchild an absolute interest or interest in possession in the home. Certain other trusts such as Bereaved Minor Trusts, 18-25 years of age Trusts and Disabled Persons Trusts can also retain this relief. However it is important to note that the use of Discretionary Trusts can cause this relief to be lost. A deed of variation can potentially rescue the situation although it can be difficult to vary a transfer into a Discretionary Trust with a wide class of beneficiaries as agreement would be needed from all beneficiaries.
Having high value homes owned by married couples as “joint tenants” can also cause a loss of relief. Although on the first death the deceased’s share of the property passes tax free to the spouse along with the deceased’s unused main residence relief the value of the combined estate on the second death may cause the relief to be tapered, potentially down to zero. This can be avoided by switching ownership of the property to “tenants in common” which allows the deceased to leave part of their share of the home to their children rather than adding to the value of the survivor’s estate.
Life decisions such as downsizing or the possible sale of the home due to choosing to live in a supported environment or with family can also be managed in advance to ensure that this valuable new relief remains available to you.
It is therefore highly recommended that your will is reviewed in order to ensure you do not lose the value of the main residence nil rate band. We should be happy to advise you here, in addition to assisting you with your inheritance tax and estate planning generally.