It was announced in the Summer Budget on 8 July 2015 that an additional inheritance tax ("IHT") nil-rate band will be introduced from April 2017 for the family home, so that a home worth up to £1 million can be passed on to younger generations free of IHT.

The idea of a £1 million IHT allowance has been part of the Conservative party's plans for some time, featuring in their manifesto for the 2015 general election, and reflects the long-standing realisation that the IHT nil-rate band has not kept pace with rising house prices, meaning that more and more estates have been pulled into the IHT net.

The additional nil-rate band ("ANRB") is a welcome reform to the IHT regime and will help many families, but there are limitations to it which, unless clarified when we get the draft legislation on 15 July, will create several potentially unfair scenarios.

The current nil-rate band is £325,000 per person, transferable between spouses and civil partners ( "spouse" hereafter refers to either.) The ANRB will apply on the death of an individual where their residential property passes to their children or grandchildren. If that individual is a spouse, any unused ANRB can be transferred to the surviving spouse.  As gifts between spouses are free of IHT, the ANRB is not likely to be needed until the death of the survivor. It will be phased in from April 2017, when the ANRB amount will be £100,000, rising to £175,000 by April 2020; with the aim that, by 2020, the maximum nil-rate band available to the surviving spouse will be £1 million (made up of each spouse's NRB of £325,000 and each's ANRB of £175,000). The ANRB will be gradually withdrawn where the estate is worth more than £2 million.

Where an individual has more than one property, the individual's personal representatives can nominate any one to benefit from the ANRB provided it has been the individual's residence at some point. This looks to be more generous than originally proposed, as the property does not necessarily have to be the individual's "main" residence, meaning the most valuable property can be nominated. We will need to await the draft Finance Bill 2015 for clarification however.

The ANRB will be of great benefit to many families. However, those without children will not be able to take advantage; neither will those who rent their property as opposed to owning it. The former category could lead to many unfair scenarios. Take the example of two elderly sisters who live together where the property (worth £1 million, say) passes to the survivor on the first death.  There will be IHT on the property to the extent each sister's share exceeds their available nil-rate band (a maximum of £325,000). The sisters will not be able to benefit from the IHT spouse exemption or the new ANRB. If the same property was owned by a married couple with children, under the new rules, by 2020, there would be no IHT to pay on the property. There will be many other similar unjust situations, and the limitation will be especially felt by couples who are not able to have children.

The mismatch of the IHT NRB with current property prices has encouraged some individuals to carry out tax planning with their family home with the aim of mitigating the IHT that their children would otherwise need to pay. In some cases, this has involved giving the family home to the next generation early but under arrangements which allow the parents to occupy the property for the duration of their lives; one such example being the reversionary lease scheme. This type of planning can successfully take the value of the family home out of the estate of the parents for IHT purposes, provided they pay an annual "pre-owned assets" tax ("POAT") for the benefit. In many cases, the introduction of the ANRB will make this type of planning redundant. Those who have spent money over the years (both in terms of POAT and professional fees) in putting this planning in place, to protect their children from a large IHT bill, are likely to be better off electing back into the IHT regime – back to where they started. For this category, the new ANRB will be bitter-sweet and will leave them out of pocket, unless provisions are included in the Finance Bill 2015 to compensate them for any POAT paid; but they would be wise not to hold their breath.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.