Inheritance tax changes – smoke and mirrors?

You will recall that the Chancellor presented his Summer Budget on the 8th July. One of the headline grabbing elements concerned Inheritance Tax (IHT) and the introduction of an additional Main Residence Nil Rate Band of £175,000 per person, on top of the existing Nil Rate Band (NRB) of £325,000.

This allows the Government to meet its manifesto pledge to “take the family home out of tax by increasing the effective Inheritance Tax threshold for married couples and civil partners to £1 million.” But is it as good as it sounds?

Details were very sparse at the time of the announcement. A few more have emerged since, but full details will only be available when the legislation is published. What is clear is that this is a fiscal sleight of hand straight out of the Gordon Brown manual of complex tax trickery.

The Main Residence NRB will only apply to married couples or civil partners who own a qualifying “residential interest” and wish to leave it to a direct descendant. This will be a child (which includes a step-child, adopted child or foster children) and/or grandchild of the deceased.

If you would like to take advantage of this new NRB, the surviving spouse shouldn’t die until after 6th April 2017 when its introduction begins. Even then, it will be phased in over four years, with the maximum amount available after 6th April 2020 so hold on until then! 

Meanwhile, the existing NRB of £325,000 per person will be frozen for the life of the parliament. So, effectively a tax increase for all taxable estates up until April 2017, and an escalating tax increase for taxable estates thereafter, that don’t qualify for the Main Residence NRB.

That is not the end of the bad news. Should the value of the estate exceed £2million, including elements that qualify for Agricultural or Business Property Reliefs, then the new Main Residence (NRB) will be swiftly tapered away. It will be lost at a rate of £1 for every £2 that the net value of the estate exceeds £2 million.

So, not so much of a great tax give away after all. Certainly better than nothing, but does our tax system really need even more complexity? In my view, the real positive aspect of this Budget with regards to IHT is that the Chancellor managed to resist the temptation to meddle with Agricultural and Business Property Reliefs.

Another positive aspect is that this loudly trumpeted change to IHT may make people sit up, take notice and check to see how it applies to them and their existing arrangements. As we lawyers often like to say, regular reviews of Wills are no bad things at all.

If you would like any further information or to discuss any rural related matter, please contact Tom Wills, head of the agriculture & estates department at Sintons.

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