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Inheritance Tax - Main Residence Nil Rate Band

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“Promise made – promise delivered” was how George Osborne summed up the new inheritance tax (IHT) main residence nil rate band (MRNRB) in his July 2015 Budget speech. The press reported that up to £1m could now be left free of IHT to children. However a closer look at the proposed legislation indicates that this may not always be the case.

Currently, IHT is charged on the estates of deceased persons at 40% where the value of the estate assets exceed the IHT nil rate threshold of £325,000. Where any of the nil rate band remains unused on the death of a spouse or civil partner it can be transferred to use against the estate of the survivor.

The current threshold has applied since 6 April 2009 but since then, house prices have risen significantly, so more and more homeowners face potential IHT charges on their estates.

In April 2009, at the height of the economic crisis, house prices had slumped and many homeowners faced negative equity. The average price of a home was £150,050; with the averaged detached property worth £231,563. By May 2015, average house prices had risen to £179,696; with detached properties at £282,854. A report in The Guardian on 11 June 2015 forecast that house prices would rise by 25% over the next 5 years. That would mean an average house price of £224,620, with detached properties commanding an average value of £353,567.

So how will the new measure effect IHT charges on homes? Effectively it will provide an additional IHT nil rate band for an individual - £100,000 from 6 April 2017, £125,000 from 6 April 2018, £150,000 from 6 April 2019, £175,000 from 6 April 2020 and increase in line with the Consumer Prices Index from 6 April 2021 onwards. Any unused MRNRB can be transferred to a surviving spouse or civil partner. This transfer will be available irrespective of the date of death of the first of the couple to die.

Therefore, post 5 April 2020 for a couple where there is a transfer of the whole of the general IHT nil rate band and the MRNRB, the headline £1m can be achieved (£325,000 x 2 + £175,000 x 2). But in the intervening years the potential IHT shelter will be lower. For a single person they will only ever have the potential to achieve, post 5 April 2020, an IHT nil rate band of £500,000 (£325,000 + £175,000)

The MRNRB can only be set against the value of a residential property in the deceased’s estate, which has at some point been their residence, and has been left to one or more direct descendants on death. A direct descendant, as well as lineal descendants, will include an adopted child, a step-child or a foster child.

The value of the MRNRB that can be claimed in an estate will be the lower of the net value of the deceased’s interest in the residential property, after deducting any liabilities such as a mortgage, or the maximum amount of the MRNRB.

Only one residential property can be covered by the new exemption and if there is more than one such property in the estate, the personal representatives will be able to nominate which one will qualify. If the deceased has never lived in a residential property the exemption cannot be claimed so it will not apply to properties such as buy-to-lets.

If the deceased has downsized, or has ceased to own a residence, on or after 8 July 2015 that part of the MRNRB will still be available - provided that the smaller residence, or assets of equivalent value, are left to direct descendants.

However, if the value of the estate, after deducting liabilities but before reliefs and exemptions, exceeds £2million the MRNRB will be tapered away at a rate of £1 for every £2 that the net value exceeds that amount. From 6 April 2021, the threshold at which the MRNRB is withdrawn will rise in line with the Consumer Price Index.


To put this into context, consider a widow who dies in July 2015 leaving an estate of £880,000; this comprises general assets valued at £650,000 and her home - a detached property worth £230,000. She made no lifetime gifts and when her husband died he left all of his estate to her; therefore spouse exemption applied so his full IHT nil rate band was available to be utilised against his widow’s estate.

Her IHT liability will be £92,000 (£880,000 – (£325,000 + £325,000) x 40%).

What would be the position if she dies in July 2020? Assume that her general assets have achieved no capital growth and are still valued at £650,000, however, the value of her home has risen as forecasted and is worth £353,500; therefore her estate totals £1,003,500.

Her IHT liability will be £1,400 (£1,003,500 - (£325,000 + £325,000 + £175,000 + £175,000) x 40%).

The MRNRB will only apply to a qualifying property – it is not a general extension to the IHT nil rate band. Therefore, an estate that is asset rich but contains a property valued at under the MRNRB will pay IHT once the general nil rate band is exhausted. This then begs the question as to whether it would be possible, or desirable, to liquidate assets to purchase a more valuable property so the maximum MRNRB can be utilised. Would such an action be regarded as tax avoidance?

It remains to be seen how the legislation will deal with positions where the deceased has downsized, and there will be a consultation in September 2015. The current guidance suggests that provided the equivalent value of the original property is passed to a direct descendant the MRNRB can be utilised against that part of the estate. However, it is not yet clear whether that would be based on the historical value of the property or the equivalent value at the date of death.

Another area to consider is what will constitute a property being a “residence” for the purposes of the relief and how will residential use be demonstrated? It is likely that the capital gains tax definitions of “residence” will be adopted, but at the time of writing, it is not clear.

A further scenario requiring clarification is whether or not the MRNRB will be available if a qualifying property is left by will into a trust for the benefit of direct descendants. For example, if there is a child of the deceased who is a “vulnerable beneficiary”. Hopefully, when the legislation is issued it will tackle this issue.

There is no doubt that the MRNRB will benefit many estates but, as usual, the headline rates will not apply to all taxpayers.

For further information please contact Carolyn Byrne on 01522 541181.