Inheritance tax relief penalties

Residence nil rate band downsizing provisions one step nearer the statute book

Recent events, and in particular the EU referendum campaign, appear to have had an effect on the speed at which the Finance Bill (which implements the budget and autumn statement announcements) is passing through parliament. We would normally expect to see the Finance Bill enacted into law by receiving Royal Assent by the end of this month. However, the bill has only recently entered the committee stage of the House of Commons and it would appear that it will not become law until the autumn this year.

For family wealth purposes one of the most important aspects of the Finance Bill is the additional provisions contained in clause 82 and schedule 15 relating to the residence nil rate band (RNRB). The RNRB was introduced in last year’s Finance Act and will, from April 2017, provide an additional inheritance tax (IHT) allowance to individuals who leave a residence on their death to (broadly) their children and grandchildren. The RNRB is transferable between spouses and will be worth £350,000 when claimed in full by a couple once it is fully in force in 2020/21. Much criticism was directed towards the RNRB when first introduced as it was seen as discouraging downsizing in older age (as this might increase the IHT paid on an estate) and it discriminated against those who were forced to sell their home before death in order to move into residential care.

As a result provisions were introduced into this year’s Finance Bill which provide for a “downsizing addition”. This means that, if someone downsized or sold up altogether after 8 July 2015, their personal representatives have the option of nominating the previously owned property for the purpose of increasing the RNRB available. For example, John and Jane own a property worth £350,000 but in their 80s they downsize to a much smaller apartment valued at the time of Jane’s death (after John) at £200,000. Jane’s executors are able to nominate the previously owned (more expensive) property for the purpose of the downsizing addition, ensuring that the RNRB is available in full on Jane’s estate. In addition, to qualify for the full allowance Jane’s net estate must be less than £2 million and she must leave assets of equivalent value to the downsizing addition to her direct descendants.

Some concern had been expressed by commentators that the downsizing addition as drafted meant that it could not be claimed in full on the death of the survivor of a couple, if on the first death a share in a property was left in trust for the survivor for life and then to the children: a common type of Will that provides for asset protection. These concerns were addressed by amendments considered in the committee stage this week so that the full RNRB downsizing addition, calculated by reference to the value of the whole property, should be available.

This technical change, if it does what is intended, is to be welcomed but this legislation remains complicated and there are traps for the unwary, so it is important that your Will is drafted in a way which maximizes your RNRB entitlement. Please contact us if you require further information or help in connection with this.