The Chancellor's 2015 Summer Budget was one of the most surprising for a while as not many of the policies had been leaked in advance. However, that did not apply to the much publicised, discussed and debated change to inheritance tax on the family home. The headlines in the newspapers have been along the lines of 'inheritance tax limit raised to £1million'. As always with tax though, this isn't quite the full story.
The announcement was that from April 2017 an inheritance tax Main Residence Nil Rate Band (MRNRB) will be introduced. This will be in addition to the current Nil Rate Band (NRB) of £325,000. Unlike the current NRB, the new MRNRB will only be available against the value of a residential property that has been the individual's home and only if that part of the estate is being passed to the individual's direct descendants. Here, direct descendants are the individual's children (be it biological, step, adopted or foster children) and their lineal descendants.
The MRNRB will be introduced gradually, starting at £100,000 per person in 2017/18, increasing to £125,000 in 2018/19, £150,000 in 2019/20 and reaching £175,000 in 2020/21. It will then increase in line with the consumer price index. The existing nil rate band of £325,000 will remain frozen until 2020/21. At this point the total IHT nil rate band for a husband and wife will be up to £1million, which is how this ties in with the oversimplified newspaper headlines.
As with the current nil rate band, the MRNRB will be transferable between spouses if not used on the first death and a claim will need to be made on the second death. Where an individual owns more than one qualifying property the executors will need to nominate to which house it will apply.
A further level of complexity is that, where an individual's net estate exceeds £2million, the MRNRB will be tapered by £1 for every £2 meaning that, from 2020/21, when the full MRNRB is in force, those with net estates in excess of £2.35million will not benefit from this measure.
There was concern that the higher relief for homes would deter the elderly from downsizing, which would result in less larger properties being freed up for families. To counteract that the MRNRB will also be available where a person downsizes or sells a home on or after 8 July 2015 and assets of an equivalent value up to the MRNRB are passed on death to direct descendants. This element is going to be subject to consultation as to how it will work in practice.
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