Inheritance tax relief penalties

The inheritance tax residence nil rate band: the downsizing provisions

In the 2015 summer budget the government introduced new legislation which had the practical effect of increasing the amount that a married couple, or couple in a registered civil partnership, could leave tax-free on death to their children to £1million, provided the estate included a property worth at least £350,000. The new legislation, known as the residence nil rate band (RNRB), was introduced in the Finance (No 2) Act 2015 and will come into effect in stages from April 2017.

The RNRB attracted early criticism: economists deemed that it would discourage taxpayers from downsizing in later life; tax practitioners criticised the additional layer of complexity introduced into the inheritance tax (IHT) legislation, and because it potentially penalised those who were forced to sell their home in later life in order to pay care home fees.

The government countered this criticism with the announcement that further legislation would be introduced to enable downsizers to claim the full amount of their RNRB entitlement. At the end of last year this supplementary legislation was included in draft Finance Bill 2016 provisions which are open for consultation until the beginning of February. We would normally expect the Finance Bill to be enacted in the summer.

On the face of it the supplementary RNRB legislation does what the government announced. In rather opaque drafting it ensures that if, at the date of death, someone owns a home of lesser value than a home previously owned and occupied by them, the former home can be nominated as the individual’s “former residence”. The value of the former home at the date of completion of its sale will be taken into account in calculating the amount of the “downsizing addition” to which that individual is entitled at the date of death. Similarly, if the estate contains no residential interest at the date of death, then a former owned and occupied property can be taken into account in assessing the RNRB available. The legislation ensures that by way of the downsizing addition the individual will be able to claim the same amount of RNRB as they would have been able to claim had they not downsized or sold their property.

If the individual has moved more than once after 18 July 2015 then the individual’s personal representatives are required to nominate which of the former residences is to be taken into account in calculating the downsizing addition.

Although this is currently only draft legislation (and other issues may need to be addressed by the time it reaches the statute book), couples should consider a review of their estate planning to ensure that their estates will benefit from the RNRB provisions in full when they take effect in April 2017.