The rise and fall of Inheritance Tax
It was reported last week that the amount of Inheritance Tax paid in the year ending May 2017 has exceeded £5 billion for the first time, an increase of 9% on the previous year's collection.
This increase is largely attributed to the steady increase in house prices in the South, whilst the nil rate band, the amount which can be passed on without incurring any Inheritance Tax, has remained at £325,000 since April 2009. The current government have advised that this amount will be frozen at £325,000 until tax year 2020/21.
At the same time, those looking to "downsize" have been put off doing so due to the new stamp duty land tax (SDLT) rates introduced in April last year. The changes include a 3% surcharge applied on top of existing rates on a purchase where an individual (or their spouse) owns more than one residential property.
Introduction of the residence nil rate band
However, this steady increase may be about to change because as of April this year, the government introduced the additional residence nil rate band ('RNRB'). This will provide a further tax free allowance in respect of a residential property that is left on death to lineal descendants at the rates outlined below:
- £100,000 for 2017/18
- £125,000 for 2018/19
- £150,000 for 2019/20
- £175,000 for 2020/21
This will also allow those that do choose to downsize or that are forced to move into a care home or rented accommodation to benefit from the additional relief.
Too good to be true?
As with most reliefs, the RNRB comes with conditions that some will not be able to fulfil. In technical terms, the two key requirements are that:
- The deceased must have owned a "qualifying residential interest"; and
- That interest must be "closely inherited".
To anyone not working at HMRC, the first condition translates as a residential property interest in a dwelling-house that was a person's residence when owned by the deceased or any other interest in the dwelling-house.
The rules are more complex than they appear at first glance because the property did not have to be owned by the deceased at the time of their death and can relate to property that they intended, in due course, to occupy if they have to live elsewhere for work related reasons.
It does not have to be a UK property, only one that would fall within the remit of inheritance tax. This is an issue which will depend on your domicile (if you are not sure about your domicile status, further advice should be sought).
"Closely inherited" also requires further investigation because the definition of people included is actually wider than might have been anticipated. In order to qualify, the residential interest must be left to the direct descendants of the deceased so their children, grandchildren or great-grandchildren etc.
It is worth noting that this also includes step children, adopted children and even foster children and is further extended to the spouses or civil partners of the deceased's descendants (who have not remarried in the case where the actual descendant died before their spouse).
The relief will, however, be tapered if your estate is valued in excess of £2 million at the time of your death so if you are on the cusp of this amount, it may be worth taking advice on gifting or making lifetime transfers into trusts.
Who are the losers?
This does of course mean that people without children will miss out on the RNRB because the relief will not apply where property is left to nieces and nephews or other relatives.
It will also mean that those who have chosen to leave their estate on discretionary trusts will not be able to benefit from the additional relief because the property is not left directly to descendants.
What to do now?
As with the introduction of any new legislation, it is worth reviewing your Will and seeking advice on how this would impact you particularly if you or a loved one are considering moving to a less valuable property or into supported living.
If you are a widow or widower, it will also be worth considering whether the RNRB of your spouse can be transferred to you so that you might be able to leave up to £1 million worth of assets to your chosen beneficiaries without incurring any Inheritance Tax.
The provisions of the RNRB are complex and if you would like to discuss these further in relation to your own estate, please contact Laura Harper.