The chancellor’s introduction of a £1m nil-rate band for inheritance tax announced in this year’s Summer Budget may not be as generous as it first appears.
In his Budget on 8 July 2015, George Osborne formally announced one of the worst-kept secrets regarding inheritance tax (IHT): the introduction of a new nil-rate band for main residences. Although it will not come in until April 2017, at a level of £100,000, it will increase by £25,000 each year until it reaches £175,000 in April 2020. However, the freeze on the basic £325,000 nil-rate band will now be extended until April 2021.
The new residence nil-rate band (RNRB) will be fully transferable between spouses and civil partners, in a similar way to the basic nil-rate band. Provided the second death occurs on or after 6 April 2017, the proportion of any unused RNRB from the first death can be taken on the second death, even if there was no such thing as a RNRB in existence on the first death. This means that if a husband dies on 1 January 2016, and leaves everything to his wife, when she subsequently dies on the 19 September 2020, leaving everything to the children, her executors will be able to claim a 100% enhancement to her basic nil-rate band as well as a 100% enhancement to her RNRB, giving a total of 2 x £325,000 + 2 x £175,000 = £1m. According to HM Treasury’s summer Budget report, this “means the effective inheritance tax threshold will rise to £1m in 2020/21”.
But is it really true that the effective IHT threshold will be £1m in 2020/21? Clearly, some taxpayers will not have been married nor will they have been in a civil partnership, so their maximum IHT threshold will be £500,000. Similarly, a divorcee will have a maximum nil-rate band of £500,000 in 2020/21. Even then, this will be the case only where they own or owned a main residence and it is or was worth £175,000 or more, after deducting any liabilities, such as a mortgage.
Additionally, the RNRB can be claimed only where the main residence passes on death to direct descendants (or ‘lineal descendants’ as defined in the Finance Bill), such as a child or grandchild. If a taxpayer has no direct descendants, the RNRB cannot be used at all.
The good news, however, is that downsizing will not result in the loss of some or all of the RNRB. Although the legislation to bring this into effect has not been included in the Finance Bill 2015, the explanatory notes accompanying the bill state that legislation will be included in the Finance Bill 2016. This will have the effect of extending the benefit of the RNRB where, on or after 8 July 2015, a person downsizes to a less valuable residence or, indeed, ceases to own a residence at all.
How this will work in detail, however, will not become clear until the publication of next year’s Finance Bill. Nevertheless, HM Treasury’s summer Budget report helpfully includes an example of how it might work. There are numerous restrictions and caveats to the apparent generosity of the chancellor but, when all is said and done, £1m-worth of nil-rate bands will become available to some people in 2020/21. So it does seem clear that by the time we get to the end of the current parliament, there will be fewer people whose estates are subject to IHT and, obviously, the total of receipts from IHT will have fallen by then. Or does it? Not according to the Office for Budget Responsibility. Despite the introduction of the RNRB, not only will total IHT receipts increase each year throughout the duration of this parliament but also the number of estates suffering IHT will increase each year.
According to HM Treasury’s summer Budget report: “The number of estates making a contribution to inheritance tax or its predecessor will continue to be higher at the end of the decade than in any year between its introduction and 2014/15.” Without suitable advice and forward planning, more clients will be suffering a greater amount of IHT, even with an apparently generous £1m-worth of nil-rate bands available to some of them in 2020/21. Additionally, the introduction of the RNRB will result in greater complication, meaning that more and more taxpayers will value good quality advice. Contrary to expectations, perhaps, the RNRB will result in an even greater need for tax planning and professional advice.
Remember UK Inheritance Tax, still applies to UK Residents & Expats and is charged at 40% (above the threshold) of the value of a person’s Worldwide Assets & Possessions etc. If you need advice on your personal UK tax liabilities including Inheritance Tax, please email enquiries to: email@example.com