Inheritance Tax

Summer Finance Bill 2015 includes new legislation with regards to the Inheritance Tax rules. The new legislation provides for an additional main residence nil-rate band for an estate. It will take effect from 06 April 2017 and will affect individuals who have an estate (including their main residence) with total assets above the nil-rate band threshold of £325,000. The estate must be left to direct descendants (child, step-child, adopted child or foster child and their lineal descendants).

Before this measure was brought in, Inheritance Tax was charged at 40% on the chargeable value of an estate above the nil-rate band threshold of £325,000. However with this new measure there will be an additional nil-rate band when a residence is passed on death to a direct descendant.

The additional nil-rate band will be:
* £100,000 in 2017 to 2018
* £125,000 in 2018 to 2019
* £150,000 in 2019 to 2020
* £175,000 in 2020 to 2021

This nil-rate band will increase in line with the Consumer Prices Index (CPI) from 2012 to 2022 onwards.

For example, if you die in 2017-2018 and the main residence which is valued at £400,000 is left in your estate, there won’t be any Inheritance Tax to pay on the £75,000 above the nil-rate band threshold of £325,000 as this will be covered by the additional nil-rate band in 2017-2018 of £100,000.

However, if you die in 2017-2018 and the main residence which is valued at £450,000 is left in your estate, there will be Inheritance Tax of 40% to pay on £25,000. This is because the nil-rate band threshold of £325,000 plus the additional nil-rate band threshold of £100,000 totals £425,000 therefore £25,000 less than the value of the house.

A few points to note with regards to this change are:
* Any unused nil-rate band will be able to be transferred to a surviving spouse or civil partner;
* The qualifying residential interest will be limited to one residential property but personal representative will be able to nominate which residential property should qualify if there is more than one in the estate;
* A property which was never a residence e.g. a buy-to-let property, will not qualify;
* For estate with a net value of more than £2million there will a tapered withdrawal of the nil-rate band. The withdrawal rate will be £1 for every £2 over this threshold;
* This additional nil-rate band will also be available when a person downsizes or ceases to own a home on or after 08 July 2015 and assets of an equivalent value, up to the value of the additional nil-rate band, are passed on death to direct descendants.

Always remember any articles on tax provide general advice and it is imperative you take specific professional advice when tax planning as no two situations are the same.

Emer McAleer