Inheritance Tax: The Nil Rate Band goes up to £1million! (but does it really?)

Friday 30 October 2015

Following the Tory election victory in May, Chancellor George Osborne announced his intention to introduce changes to the inheritance tax rules. Currently, each person can leave £325,000 free of inheritance tax (the ‘nil rate band’) and therefore a married couple (or civil partners) can pass on a total of £650,000 between them free of inheritance tax.

The Chancellor has announced that, with effect from April 2017, a new ‘residence nil rate band’, will also be available, when someone leaves their home to their  ‘direct descendants’. In such cases, there would be an additional tax free allowance for each person. The amount of the new ‘residence nil rate band’ shall initially be £100,000 and will rise to £175,000 by 2020.

This means there will be the potential for married couples (or civil partners) to pass on £1million free of inheritance tax.

However, as the benefit will only be available to those with direct descendants , and who have an estate (including a qualifying property) with a total value above the inheritance tax threshold, in reality the benefit will not be felt by the majority of people.

Indeed the headline figure of £1million free of inheritance tax should be treated with much scepticism. The ‘residence nil rate band’ only applies if a person owned a qualifying property, and then only if such property  is bequeathed  to a ‘direct descendant’.

The term ‘direct descendants’ may include some modern family structures such as step children, but will not include nieces and nephews for instance –  a move which Ann Widdecombe (former Conservative politician) has described as ‘punishing the childless’ .

Also, there will be a tapered withdrawal of the ‘residence nil rate band’ for estates with a net value of more than £2 million.

The change is likely to lead to confusion and uncertainty. For example, if a property is sold during a person’s lifetime, in order to pay for their care fees, will the ‘residence nil rate band’ still be available?

Also, how should Wills be drafted when the changes come in – will discretionary trusts in Wills still be suitable? It seems unlikely – and many people currently have such trusts in their Wills.

A more straightforward approach would have been simply to increase the nil rate band for everyone, rather than introduce complex legislation that is likely to lead to confusion and misunderstanding, particularly as these changes will only be of benefit to a small proportion of people.