£1million
THRESHOLD FOR INHERITANCE TAX?
In his recent budget, the Chancellor George Osborne introduced
a new plan to increase the threshold for inheritance tax which,
when fully implemented, will mean that in some cases a couple
will be able to leave estate of up to £1million to their heirs
without paying inheritance tax, as opposed to the current
maximum of £650,000 before tax falls due.
But achieving the full exemption will
depend on a number of factors – not
least timing. The plan is to be introduced
in stages starting from 6 April 2017 by
creating a new “main residence nil rate
band” of an additional £100,000 on top
of the current £325,000 (which itself,
frozen since 2010/11, is now fixed until
2020/21). This new band will rise by
£25,000 each year until it reaches the full
£175,000 in 2020. So in the first year of it
being in force, the first of a married or civil
partnered couple can leave their whole
estate to their partner free of inheritance
tax (as transfers between spouses and
civil partners are tax free) and on the
death of the second partner, they will
have their own threshold of £325,000,
plus the extra of £100,000 for the main
residence, making £425,000, plus the
same amount transferred from the first
partner to die, giving a total before tax
is due of £850,000. Come 2020 this will
mean the full £1million is finally available.
The new band will apply to the
deceased’s interest in a residential
property, which has been their residence
at some point and is included in their
estate, and which is left to one or
more direct descendants on death.
If the deceased had more than one
property that could qualify as their “main
residence” then their Executors can
nominate to which the relief should apply,
and the value of the property will be the
lower of the net value of the deceased’s
interest (after deducting any liabilities
such a mortgage) or the maximum
amount of the band. A property which
was never a residence of the deceased,
such as a buy-to-let property, will not
qualify, and so if you have rented all your
life and thus have more cash in the bank
than those who bought a property, the
new band will not apply to your estate
either.
However, to qualify for the additional relief
the estate has to be passed to “direct
descendants” which for the purposes of
this legislation includes children, adopted
children, stepchildren and foster children,
and their lineal descendants. This means
that single or divorced parents wishing
to leave their estate and property to their
children will only have a maximum of
£500,000 available before inheritance tax,
and those without children or remoter
direct descendants will not benefit from
the increase at all, so a generous uncle
could not leave his house to his nephews
and nieces tax-free.
If you are lucky enough to have an estate
that exceeds £2million in net value, then
for every £2 over £2million, £1 will be
deducted from the new main residence
threshold from 2017.
If you have to sell your property to
downsize, or to take up residence in a
care home, for example, you will still
be able to pass on the new property or
the balance of the proceeds of sale to
your children free of tax up to the same
levels, as you will still be able to claim the
main residence nil rate band from 2017.
The legislation will provide that where
part of the main residence nil rate band
might be lost because the deceased had
downsized to a less valuable residence
or had ceased to own a residence on
or after 8 July 2015, that part will still be
available provided the deceased left that
smaller residence, or assets of equivalent
value, to direct descendants. However,
the total amount available will not exceed
the maximum available main residence
nil rate band. This is still subject to
consultation.
It is not yet clear how this plan will work
for properties left into trusts, or where a
deceased’s residuary estate is divided
between direct descendants and other,
non-related beneficiaries such as other
family members (in-laws, perhaps) or
charities, but information will undoubtedly
be produced before the new rules take
effect.
By Rebecca Haywood
19