The much heralded changes to Inheritance Tax are not as beneficial as they first appear. Lurking in the small print behind the headline grabbing tax-free allowance of £1,000,000 for married couplesis the staggering of the new “residence nil rate band.” The effect of this is that although the new residence nil rate band will be introduced in 2017, it will not be until 2020 that the allowance reaches its full amount of £175,000. As a result, the maximum amount a married couple may pass free of Inheritance Tax in April 2017 will only be £850,000.
At present each individual is entitled to a nil rate band. This is an amount on which no Inheritance Tax is charged. Above the nil rate band Inheritance Tax is generally charged at 40%. The nil rate band has been set at £325,000 since 6 April 2009. Transfers to spouses or civil partners do not attract Inheritance Tax and any unused portion of a nil rate band is available to be used on the surviving spouse’s death.
The Summer Budget 2015 has introduced a new concept of the “residence nil rate band” which enables an additional sum to pass free of Inheritance Tax. The parameters of this additional sum are subject to a technical consultation. At this stage it appears it needs to either be directly referable to an interest in a property, or a monetary sum which represents the proceeds of a property owned as at 7 July 2015 but which has since been sold. It also appears that in order to be eligible there are restrictions on who inherits, with reference made in the Budget to “direct descendant” such as a child or grandchild.
Importantly, there will be a tapered withdrawal of this new residence nil rate band for Estates with a net value of more than £2million. The rate of this tapered withdrawal is £1 for every £2 over the threshold meaning that a net Estate worth £2.2 million as at 6 April 2017 will not see the benefit of this new provision.
It is also worth noting that the original nil rate band, which is currently frozen until April 2018, will continue to be fixed at £325,000 until 2020.
Therefore, while the changes may appear to be attractive at first glance, it is clear that Inheritance Tax remains an important factor for families and should continue to be considered when contemplating making or updating a Will, and undertaking lifetime planning.
If you would like to discuss any issues raised further please contact Richard Monkcom or Matthew McCormick.This note does not constitute legal advice but is intended as general guidance only. It is based on the law in force as at July 2015