Inheritance Tax update – July 2015

The Current Law (in a nutshell):

Each individual has a Nil Rate Band (NRB) for Inheritance tax purposes which allows them to gift up to the value of their available NRB tax free on their death. Subject to other available tax allowances that may apply to a deceased’s assets, anything over and above the NRB will be taxed at 40%. 

Proposed changes to the Current Law:

In the recent UK Budget, Chancellor George Osborne has announced that the current NRB of £325,000 will be frozen until the end of 2020/21. From 2017/18 however an additional nil rate band (ANRB) will be available when a deceased’s ‘main residence’ is passed on death to a direct descendant (i.e. a child or grandchild). 

The proposed ANRB is as follows:

£100,000 in 2017/18

£125,000 in 2018/19

£150,000 in 2019/20

£175,000 in 2020/21 

The value of the ANRB is the value of the residence (after deducting mortgages etc) or the maximum amount, whichever is the lowest. 

In practice, the NRB allowance together with the ANRB allowance will allow individuals to gift assets on death that are worth up to £500,000, including a family home, without paying anyIHTat all. For married couples and civil partners, the total is £1million as any unused ANRB will be transferable to a surviving spouse of Civil Partner.  

What if I downsize from my current ‘residence’?

Anyone who wants to downsize to a smaller property after the 8th July 2015 will be eligible for an “inheritance tax credit” so that even if they sell an expensive property they will still qualify for the new ANRB. 

What if I have more than one ‘residence’?

Your Personal Representatives (Executors or Administrators) will have to nominate which of your properties will qualify for the ANRB. 

What if I transfer my ‘residence’ in my lifetime?

The relief will not apply to lifetime transfers. 

What if my estate is worth over £2m?

For every £2 of value over £2 million, there is a tapered withdrawal of £1 from the ANRB. So those owning particularly expensive properties won't get the same level of tax break.