Budget 2015 - Changes to Inheritance Tax
FAQs on how the widely anticipated changes to the Inheritance Tax nil rate band will operate.
How does the Inheritance Tax nil rate band ("NRB") currently operate? Each individual has an Inheritance Tax free allowance of £325,000 which can be used in lifetime and on death. On death, any unused NRB can transfer to a surviving spouse or civil partner for use on their death.
What is the objective of the new proposal? The Conservative government is attempting to fulfil its long-held promise to increase a married couple's combined NRB to £1million.
How is this achieved? Alongside the existing NRB, each individual will be given an additional nil rate band (ANRB) of up to £175,000. The ANRB can be applied against the value of the family home which the government recognises as the asset that most frequently tips families over the Inheritance Tax threshold.
How does it operate? The ANRB only applies on death, and only if the property (or replacement value – see later) passes to a direct descendant (including step, adopted or foster children).
Which properties can it be used against? The ANRB can be applied against an interest in a property that is or was the deceased's main residence. If the deceased owned multiple properties satisfying this criterion, the personal representatives can elect one property to use. A property never occupied as a main residence (such as a Buy to Let) would not qualify.
Is the additional nil rate band restricted to high value homes? The ANRB can be applied against any value property. This may mean that the NRB can be applied against other assets. In other words the ANRB can provide tax benefits for anyone owning even a modest home.
Is the additional nil rate band restricted for high value estates? If the net estate (before reliefs and exemptions) exceeds £2million, the ANRB is tapered away by £1 for every £2 that the net value exceeds this amount. Therefore an estate of £2.35million would not benefit from the ANRB at all (until the thresholds rise).
What happens if any ANRB is unused? Any unused ANRB can be transferred to a surviving spouse or civil partner (as per the regular NRB). If there is no surviving spouse or civil partner, then the ANRB would be lost.
What would happen if the deceased sold their home prior to their death? If the deceased downsizes or sells up after 8 July 2015, the ANRB can be applied against assets of an equivalent value so the tax allowance is not lost.
When will the new rules apply? The ANRB will be phased in over a four year period from the 2017-18 tax year until 2020-21, increasing from £100,000 in 2017-18 to £175,000 in 2020-21, and increasing in line with the Consumer Prices Index thereafter.
What is happening to the existing nil rate band? The NRB will be frozen (at £325,000) until the end of 2020-21.
If you would like more details as to how this will operate, how this will affect you or your clients and what can be done to take advantage of these and other tax changes, please contact Paul Colman or any member of the Wrigleys' Private Client team on 0113 244 6100.
You can also keep up to date by following Wrigleys Private Client team on Twitter here
The information in this article is necessarily of a general nature. Specific advice should be sought for specific situations. If you have any queries or need any legal advice please feel free to contact Wrigleys Solicitors.