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Inheritance Tax and Main Residence Relief

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Nothing is more certain than death and taxes. Well, from April 2017 those two worlds will come together to deliver some uncharacteristically welcome news. This is an increase in the threshold, above which an individual’s estate on death is liable to inheritance tax.

Considering the Inheritance Tax rate is 40% (or slightly less if you leave 10% to charity), any increase in the threshold represents for some, a significant tax saving. The key here is “some”. This is not an increase in the tax threshold that applies universally, it comes with it a number of restrictions.

By contrast, the inheritance tax threshold that does apply indiscriminately is called the nil rate band (NRB): each individual is entitled to hold assets up to this value before tax is due. The level currently is £325,000. So the value of the estate above that level attracts tax at a rate of 40%. There are some extensions to this, for example gifts between spouses/civil partners or to charity. With the former, the surviving spouse/civil partner can also claim a percentage of the NRB their spouse/civil partner did not utilise. This is called the Transferable NRB. This ability to roll-forward the unused NRB means there is less need, indeed less incentive to gift outside the marriage/civil partnership on the first death.

The increase due this coming spring introduces a new tax-free slice directly linked to the value of the main residence. In addition, the property must pass, whether my Will or intestacy or by survivorship to a direct descendant. The benefit however will be withdrawn progressively for estates with a net worth of over £2m. 

The definition of ‘descendant’ has been given a more modern index and has been expanded to include step, foster or adopted children as well as grandchildren.

Through additional £25,000 increments, the 2017 residence NRB will rise from £100,000 to £175,000 by 2020/21. This represents the cap on the tax benefit. For example, if the value of your property is less than £175,000 (or indeed twice that if the estate is passed between spouse/civil partner on the first death), the value ‘discounted’ from the value of your estate is only up to the value of your property.  That is unless you have downsized, whereby a downsizing addition may apply.

Indeed, if you rent as opposed to own your property, the potential benefit is lost.

Headlines were made of the so called £1m tax inheritance tax threshold, which gives an exciting albeit inaccurate view. The figure is calculated with 2020/21 thresholds in mind and represents the maximum tax free threshold where A + B applies. A: the whole estate is passed to the surviving spouse/civil partner, so double NRB = £650,000. B: on the second death the residence, worth no less than £350,000 (subject to downsizing relief) to left to descendants. On this second death, the descendants can be children of either spouse but not necessarily both.

So from a political point of view, the change in legislation looks appealing. It does however disadvantage those who are not married or in a civil partnership, do not have children (or who do not wish to leave their residence to them) or indeed do not own their home. A perhaps fairer and certainly less complex approach would have been to increase the NRB for all. Instead, the NRB however is not set for review until 2020/21.

Such tax benefits of transferring your estate to your wife/civil partner or claiming downsizing relief need to be claimed, otherwise the relief is lost. Come and talk to me, or one of my colleagues to ensure that your assets have been correctly provided for and protected.

Alice Morgan is an Associate Solicitor at Chattertons Solicitors, 17-23 West Parade, Lincoln, LN1 1NW.