Inheritance Tax: The Changing Nil-Rate Band

Monday, 10 August 2015

The recent 2015 summer budget announced that the Conservative government wish to reduce the burden of Inheritance Tax on families that are to receive the family home, thus reducing the tax charge.

The recent 2015 summer budget announced that the Conservative government wish to reduce the burden of Inheritance Tax on families that are to receive the family home, thus reducing the tax charge.

Will you be affected?

Yes, either if you inherit from a direct descendant or your estate will be passed to a direct descendant on your death, as long you have direct descendants and an estate (inclusive of a main residence) with assets totaling over the current Inheritance Threshold of £325,000.

What are the new changes?

If you receive a residence on the death of a direct descendant or you intend to pass your residence on your death to a direct descendant, you / the estate will be entitled to an additional nil rate band.  The new amount increases each year and the proposed additions as follows;

  • £100,000 in 2017 to 2018
  • £125,000 in 2018 to 2019
  • £150,000 in 2019 to 2020
  • £175,000 in 2020 to 2021

From 2021 to 2022 this amount will then increase with inflation based on the Consumer Prices Index. You will still be able to carry across any unused nil-rate band to your surviving spouse or partner.

You will not lose out if you decide to downsize or no longer own your home, on or after 8th July 2015 on the basis that you are still passing assets equivalent of the new nil rate band to direct descendants.

The current nil rate band will be frozen at £325,000 until the end of 2020 to 2021.

When does this start?

Once any relevant transfers have taken place on death on or after 6th April 2017. You can at this time apply it to reduce the payment of inheritance tax on death, however this new proposal will not reduce the tax payable on any life transfers chargeable as a result of death.

The main residence nil-rate band will be transferable where the second spouse or civil partner of a couple dies on or after 6 April 2017 irrespective of when the first of the couple died.

Proposed Provisions;

  • The new proposals are limited to only one property, if there is more than one in the family, your personal representatives will be able to nominate which property can qualify. However, this will not include a buy to let property - it must have been a residence in which the deceased lived.

  • Only a direct descendant - meaning a child (including step, adopted and foster child) and their lineal descendants will qualify.

  • The claim is only made on second death of the spouse or civil partner, when transferring any unused nil rate band, the same way it is currently claimed.

  • If the estate exceeds £2million, the additional nil rate band will be reduced by £1 for every £2 that the net value exceeds the amount.

  • There is to be a further consultation published in September 2015 to explain further of how the additional nil rate band can be applied to those that have downsized or no longer own their own home.