The Residence Nil Rate Band – Will You Qualify?

We look ahead at the implications of the new inheritance tax allowance coming in next year.

From April 2017 a new inheritance tax allowance will be introduced which will be in addition to the standard £325,000 nil rate band. The new allowance will be known as the residence nil rate band and, as the name suggests, it will be available to set against the value of a residence which is passed on to close descendants. The allowance will initially be £100,000 and will increase by £25,000 for each of the following three years reaching £175,000 in April 2020. As is the case with the existing nil rate band, the new allowance will be transferrable between spouses, which means that by 2020 spouses will potentially have a combined allowance of £1 million.

There are provisions to say that where a person downsizes or sells their house to move into a nursing home, the proceeds of sale can still qualify for new relief so long as they are passed on to a descendant but at the other end of the spectrum there are also provisions to say that where an estate exceeds £2 million the new relief will be withdrawn on a sliding scale.

These are the basic provisions but, as always, the devil is in the detail. If you think that the new allowance may be of relevance to you, it would be sensible to take our advice in the run up to April 2017 to ensure that you will qualify, as there are traps that could catch out the unwary.

Although this is not intended as an exhaustive list, the potential traps include the following:

• Many existing Wills include trust provisions which were included for tax planning reasons that are no longer relevant and in some circumstances, these trust provisions could prevent the new allowance from applying because they could have the effect of directing the house into the trust rather than to descendants. The exact position will depend upon the precise circumstances of each person and there are other pros and cons of such trust arrangements in Wills to be considered but if you have a Will containing a trust you should review whether it is still appropriate.
• Similarly, Wills leaving an estate to descendants subject to them reaching a specific age could cause problems by inadvertently creating trusts which could interfere with the working of the new allowance.
• It is the value of the equity in a residence which is relevant for the new relief which means that if you have a loan secured on your property (for example equity release) this could reduce the amount of the new allowance that will be available. In such circumstances you might want to consider whether you could transfer the security for the loan to other assets.
• If you have a large estate, the ¬£2 million threshold over which the new allowance will be withdrawn needs to be considered. You might want to consider whether you could give away assets while you are still living to reduce the value of your estate to secure the new relief.
• Where spouses own more than one property, the way in which they own the properties between them could affect the overall amount of relief that they will be entitled to.
• You should also consider whether there are any aspects in relation to the wording of your Will generally that might cause a problem. For example, if your Will includes a gift of your present property specifically, would the relief still apply if you move?

The message is that while the new relief will be of significant value for many people, it is important to plan ahead and to be sure that your finances and your Will are arranged appropriately. If you believe that the residence nil rate band will apply to you please contact our Personal Law team for further advice.