Changes to the nil-rate band when an individual downsizes their property.

Legislation in the Finance Bill 2016 provides that where part of the main residence nil-rate band might be lost because the deceased had downsized to a less valuable residence – or had ceased to own a residence on or after 8 July 2015 – that part will still be available provided the deceased left that smaller residence, or assets of equivalent value, to direct descendants. However, the total amount available will not exceed the maximum available residence nil-rate band.

Transferable main residence allowance

Everyone in the 2016/17 tax year has a tax-free inheritance tax (IHT) allowance of £325,000. The allowance has remained the same since 2010/11, and will stay frozen until the end of 2020/21.

The chancellor announced a new transferable main residence allowance, which will gradually increase from £100,000 in April 2017 to £175,000 per person by 2020/21. This is in addition to the main nil-rate band. It will effectively raise the IHT-free allowance to £500,000 per person.

The value of the main residence nil-rate band for an estate will be the lower of the net value of the interest in the residential property (after deducting any liabilities such a mortgage) or the maximum amount of the band. The maximum amount will be phased in so that it is:

  • £100,000 for 2017/18
  • £125,000 for 2018/19
  • £150,000 for 2019/20
  • £175,000 for 2020/21.

Where married couples jointly own a family home and want to leave this to their children, the total IHT exemption will be £1m.

The qualifying residential interest will be limited to one residential property but personal representatives will be able to nominate which residential property should qualify, if there is more than one in the estate. A property that 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 stepchild, adopted child or foster child) of the deceased and their lineal descendants.

A claim will have to be made on the death of a person’s surviving spouse or civil partner to transfer any unused proportion of the additional nil-rate band unused by the person on their death, in the same way that the existing nil-rate band can be transferred.

If the net value of the estate (after deducting any liabilities but before reliefs and exemptions) is above £2m, the additional nil-rate band will be tapered away by £1 for every £2 that the net value exceeds that amount. The taper threshold at which the additional nil-rate band is gradually withdrawn will rise in line with CPI from 2021 to 2022 onwards.

IHT – domiciled

From 5 April 2017, individuals who are born in the UK to parents who are domiciled here, and who have acquired a domicile of choice elsewhere, will be treated for IHT purposes as domiciled in the UK if at any time they were resident in the UK in at least one of the two previous tax years.

The government will also legislate so that from April 2017 anybody who has been resident in the UK for more than 15 of the past 20 tax years will be deemed to be domiciled in the UK for all tax purposes. This is being reduced from the current 17 year deemed domicile rule for IHT.

IHT – resident but non-domiciled

The chancellor announced a number of important changes to the tax treatment of individuals who are resident but not domiciled in the UK. Such individuals currently benefit from a number of tax advantages, such as exemption from UK IHT on assets situated outside the UK and, in some cases, only being taxed on overseas income and gains if those amounts are remitted to the UK.

From April 2017, IHT will be payable on all UK residential property owned by non-domiciles, regardless of their residence status for tax purposes, including property held indirectly through an offshore structure.

Article from ACCA In Practice