Whilst the residence nil rate band of £150,000 per person from 2019/20, rising to £175,000 per person (from 2020/21) may provide some respite from potential IHT liabilities remember that:
this only applies on deaths occurring after 5 April 2017;
it will not help people whose estate exceeds £2.35 million (£2.7 million on the second death).
The IHT nil rate band will remain frozen at £325,000 until April 2021, increasing the amount of IHT collected by HMRC to substantial levels, particularly as house prices and investment values increase. People whose estates may be affected should therefore take early action.
Changes to the IHT residence nil rate band
Any unused residence nil rate band can be transferred to a surviving spouse (or civil partner) who meets the relevant requirements. The residence nil rate band is also available where a person downsizes their residence or ceases to own a home on or after 8 July 2015, provided the former home would have qualified for the residence nil rate band had it still been owned. In this situation, assets of an equivalent value, up to the limit of the relevant residence nil rate band, can be passed on death to one or more direct descendants on a tax-free basis.
Finance Act 2019 made amendments to the residence nil rate band, with the key change clarifying the operation of the downsizing provisions. Unfortunately, the new legislation, which applies to deaths occurring on or after 30 October 2018, is less favourable to taxpayers than the old rules. Until 29 October 2018, only the value of the qualifying residential interest comprised in the deceased’s estate which is part of the chargeable transfer was counted in the calculation, whereas, after that date, the value of the qualifying residential interest comprised in the deceased’s estate which is both chargeable and exempt has to be considered. An example of where this is relevant is where a residential property passes equally on death to a surviving spouse (i.e. an exempt transfer) and to a direct descendant such as a son or daughter (i.e. a chargeable transfer).
It has been reported by some tax commentators that HMRC had been using this method of calculation for deaths occurring on or before 29 October 2018. If so, then some death estates will have been overcharged IHT.
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