How will the changes to Inheritance Tax announced in the Summer Budget affect you?

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It has long been on the radar that a Conservative government would look to reduce the Inheritance Tax (IHT) liability on death.

The much talked about £1 million Nil Rate Band (NRB) may not have quite appeared, but instead, from April 2017 an additional Main Residence Nil Rate Band aimed at passing on the main residence to a direct descendant on death will come into effect.

This will start at £100,000 for 2017/18 and increase by £25,000 each year until 2020/21 when it will be £175,000.

It will then increase in line with Consumer Price Index from 2021/22 onwards.

As with the normal NRB any unused main residence NRB will be transferred to a surviving spouse or civil partner.

This means that on a second death after 5 April 2020 there will be the potential for a total NRB of £1 million (being two NRBs at £325,000 plus two additional NRBs at £175,000).

It will also be available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to the value of the additional NRB, are passed on death to direct descendants. The details of this are to be subject to a consultation which is to be launched in September 2015.

In order for a property to qualify it must have been the residence of the deceased at some point, so buy-to-let residences will not qualify. However, where there is more than one qualifying property it will be possible to elect which property to apply the NRB to. Therefore if the deceased had moved to a smaller property and let out the old larger family home, the NRB could still be applied to the more valuable old family home.

There are restrictions to this additional NRB:

  • The additional NRB is withdrawn at a rate of £1 for every £2 that the value of the net estate is above £2 million. E.g. a first death estate of £2.1 million in 2017/18 would only be entitled to £50,000 on the additional NRB.
  • The additional NRB is restricted to the lower of:

               - the additional NRB for that year

               - the value of the main residence

It was also announced that the normal NRB will now continue at £325,000 until 2020/21, meaning that it will not have increased for 11 years, having been at this level since 2009/10.

Whilst the changes announced to IHT could give rise to an overall reduction in inheritance tax liability, the proposed approach could lull you into a false sense of security. Why? There are a number of reasons, not least for most of the country property prices continue to rise and also it is not untypical for families to be more fragmented and dispersed, with perhaps few family members wanting to live in a ‘family’ home’.

The outcome for these two scenarios could then give rise to an overall increase in tax due or the scenario where the chance to benefit from the relief is lost as you cannot comply with the conditions. 

Also, the new relief does not affect other assets, which will continue to form part of the overall estate and will be subject to IHT. Given this background it might be dangerous to believe that your overall estate will either fall out of the IHT threshold or that your liability might be reduced, without appropriate and timely tax planning.