Updates following the recent Budget
New Main Residence Nil Rate Band Planning
In the recent Budget further details on the new additional “Main Residence Nil Rate Band” were announced. This will benefit individuals with direct descendants who have an estate, which includes a main residence, with total assets above the current inheritance tax threshold, or nil-rate band.
What is the “Main Residence Nil Rate Band”?
The new proposal is to introduce an additional nil-rate band when a residence is passed on death to a direct descendant.
- This will be phased in at £100,000 in 2017-18, £125,000 in 2018-19, £150,000 in 2019-20, and £175,000 in 2020-21. Thereafter it is proposed that it will then increase in line with Consumer Prices Index (CPI).
- Any unused nil-rate band will be able to be transferred to a surviving spouse or civil partner.
- The additional nil-rate band will still be available when a person downsizes or ceases to own a home on or after 8 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.
- There will be a tapered withdrawal of the additional nil-rate band for estates with a net value of more than £2m.
- The measure will take effect for relevant transfers on death on or after 6 April 2017.
Who will not be impacted?
The new proposals will not impact a number of client scenarios.
- Single clients with less than £325,000 of assets.
- Married clients with less than £650,000 of assets.
- Clients with more than £2.7 million of assets.
What does it mean for clients that can benefit?
The new Main Residence Nil Rate Band will mean that a single person will ultimately be able to leave an additional £175,000 of main property assets and a married couple an additional £350,000, or the proceeds from downsizing, as long as they leave it to a child or grandchild.
- It only applies to death time transfers and cannot be applied to lifetime transfers that are chargeable as a result of death.
- The main residence nil-rate band will be transferable where the second spouse or civil partner dies on or after 6 April 2017, irrespective of when the first of the couple died.
- The value can be applied to a residential property which has been occupied by the deceased.
- It can only be applied to a single property nominated by executors (personal representatives).
- Properties such as rental property will not apply.
- A property which was never a residence of the deceased, such as a buy-to-let property, will not qualify.
- A direct descendant will be a child (including a step-child, adopted child or foster child) of the deceased and their lineal descendants.
- For estates above £2 million the additional nil-rate band will be tapered away by £1 for every £2 that the net value exceeds that amount.
- Where the deceased had downsized to a less valuable residence or had ceased to own a residence on or after 8 July 2015, assets of equivalent value may be left to direct descendants. The exact details will be subject to a consultation by HMRC starting in September 2015.
The new additional Main Residence Nil Rate Band is a welcome addition in terms of tax planning. The downside however, is that in order to benefit, assets cannot be protected and must be left to direct descendants, so bloodline protection will be lost for this portion of your estate. This change means that you will need more bespoke advice depending on your current financial situation and medium term plans.
If you have planning in progress it is important to continue with this so that any protective benefits are realised and in place for the next two years. If you have established planning you will be unaffected as your estate may, either, not warrant a change or could be too large to benefit.