The Summer Budget included a new tax break for homeowners whose estates are worth enough to be liable to inheritance tax. So how will the new tax allowance work and is there any planning you should be doing to take advantage?
During the run up to the general election the government made promises to reduce the number of estates caught by inheritance tax (IHT). The Chancellor came good on the promise in the Summer Budget by announcing a new tax break.
New nil rate band
A special IHT nil rate band (NRB), called the main residence nil rate band (MRNRB), will be introduced and allowed in addition to the normal NRB (which is £325,000 until at least 6 April 2021). It will only apply in respect of transfers of homes or value derived from homes which are made:
• on death, i.e. it doesn’t apply to lifetime transfers; and
• to a direct descendant, e.g spouse, son, granddaughter, etc.
The MRNRB will be available to the estates of those who die on or after 6 April 2017. It will start at £100,000 for 2017/18, increase to £125,000 in 2018/19, £150,000 in 2019/20 and £175,000 in 2020/21. It will then increase in line with the consumer prices index from 2021/22 onwards.
Like the normal NRB any MRNRB that is not used by an individual’s estate can be transferred to their surviving spouse or civil partner. Therefore on death when a person passes their share of their home to their spouse none of the MRNRB is used because gifts to spouses etc. are exempt from IHT. When the surviving spouse/civil partner dies their estate will therefore be entitled to two MRNRBs.
The MRNRB will be restricted for estates which have a net value of more than £2 million. The restriction will be £1 for every £2 over the threshold. So, for example, an estate with a net value of £2,100,000 will lose £50,000 of the MRNRB (£2,100,000 – £2,000,000/2).
Value derived from homes
The MRNRB will also be available where a person downsizes or ceases to own a home on or after 8 July 2015 and assets or an equivalent value, up to the amount of the MRNRB, are passed on death to direct descendants. Example. Harry sells his house for £450,000 on 1 October 2015 and buys a new one for £250,000. He dies on 1 May 2018 leaving his whole estate, worth £800,000 to his daughter. Harry’s estate will be entitled to the MRNRB of £125,000. If Harry had died before 6 April 2017 his estate would not have benefited from the MRNRB.
Tip. To ensure that your estate will qualify for the MRNRB where you downsize your home or sell but don’t buy another, it’s important that you keep a record of how much money is released from the transaction. Keep the information where it will be readily available to your executors.