Radical changes to Inheritance Tax-The Family Home

The summer Budget introduced a new Family home allowance to start in April 2017.

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Key points

  • The new allowance that is in addition to the existing nil rate band will be phased in from 2017 eventually giving an extra £175,000 allowance to those that qualify.
  • The inheritors must be your children, step-children, or their descendants. Included also are adopted children (as you would expect) and foster children.
  • Wealthier multi-millionaires may not benefit as the allowance is reduced if the net estate (after qualifying liabilities are deducted) is over £2 million. It is reduced by £1 for every £2 that the estate exceeds £2 million. So if an individual had a net estate of say £2.5 million they would not qualify.

 

So here is how it looks for each person:

Existing nil rate band allowance £325,000. (This is transferable between couples.)

From 6th April 2017 additional allowance will be £100,000.

From 6th April 2018 additional allowance will be £125,000.

From 6th April 2019 additional allowance will be £150,000.

From 6th April 2020 additional allowance will be £175,000.

Thereafter it should increase in line with the Consumer Price Index.

So using simple maths you can see that the total allowance for a couple will reach £1 million from 6th April 2020.

 

So what qualifies as your home or the “qualifying residential interest”?

  1. Your interest in a home that has been lived in as your main residence.
  2. If you have more than one residence then your executors or personal representatives can elect which one is to qualify.
  3. A “Buy to Let” property for example would not qualify unless it had been your main residence at some time.
  4. There are various other minor provisions for those living away from home in job-related living accommodation.

 

Example

In 2020, Dave & Samantha jointly owned a home worth £900,000 and had two grown up children. Dave died in May 2020 and he willed everything to Samantha. Because he had not gifted monies in his lifetime or in his Will, he had the full nil rate band (NRB) of £325,000. In addition he has the new residence nil rate band (RNRB) of £175,000. However there is no Inheritance tax to pay at this time because everything has passed to Samantha.

Sadly Samantha died soon after. Happily for the children Dave’s NRB and the newRNRB are transferable to Samantha’s estate. So in total the allowance was £1 million.

Samantha has spent all the remaining family cash on nursing care. Despite the fact that she died in a nursing home and had not lived at home for 6 months, the full allowance was available.

When Samantha’s estate was concluded HMRC collected no Inheritance Tax at all from the estate.

 

Very nice, but what are the problems?

Apart from the political nature of this concession which we shall leave aside, most commentators feel all this is unnecessarily complicated.

As an example, “The additional nil-rate band 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 nil-rate band, are passed on death to direct descendants.”

This point alone will employ lots of folk in HMRC in lengthy correspondence with executors and PRs who incidentally will need to know about this in order to claim it!

There is much to be ironed out in the legislation, too much to mention here.

One issue that is notably important is that some may have discretionary trust arrangements in your Wills passing family homes and other assets via this route. It looks likely that if you continue to use that route you will NOT qualify for the allowance. Other types of trusts such as life interest trusts and trust for minors and under 25s will be okay.

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Picture :  Executor who missed out on the family home allowance.