Nil by inheritance

July’s Summer Budget was the first all Conservative Budget in 19 years, and it brought some surprises and some long-awaited announcements. One such announcement was a change to the inheritance tax nil rate band (NRB).

Although there were plans for the NRB to be increased to £350,000 by 2010, these plans were set aside during the recession and the band has been fixed at £325,000 since 2009. Before then it had been increased most years, and three years was the longest there had ever been without an increase. This, together with inflation, particularly in the housing market, has been pushing more and more estates over the NRB and into the realms of inheritance tax charged at 40 per cent.

The transferable NRB, introduced in 2007, allows spouses to pass any unused part of each of their bands between themselves. Previously it was lost if it was not used. As most spouses leave their estates to each other on the first death, and transfers between spouses are exempt from inheritance tax, many couples lost one NRB.

Maximum benefit

The band was a simple and effective way of ensuring that maximum benefit was achieved from the existing regime. It has benefitted many people since its introduction and went a considerable way to counteracting the lack of increase in the NRB. In short, most couples now have a total allowance of £650,000 on the death of the survivor which is when inheritance tax is usually paid.

However, the transferable NRB is of no benefit to those who are not married or in civil partnerships. In 2008 two sisters in their 80s, Joyce and Sybil, who had lived together all their lives and wanted to leave their estates to each other, lost an appeal to defer the tax payable on their estates until the second death and to transfer their NRBs between themselves. The implications of this for cohabiting siblings, unmarried couples, or others in similar situations are that they may have to sell their home after the first death in order to pay the tax that arises.

Complicated approach

The Conservative party first pledged to increase the band to £1m in 2007. Such an increase has been mentioned many times since, most notably in the Conservative’s manifesto before the general election.

It therefore came as no surprise that the summer budget included a change to the NRB. Rather than simply increasing the band to £500,000 per person (and therefore £1m per couple for those who are married or in civil partnerships) a main residence allowance (MRA) is being tagged onto the existing NRB. This was expected and is a sensible if slightly complicated approach as it is usually the value of the house which pushes an estate over the threshold.

This additional allowance will be introduced over a number of years from April 2017. By 2020 each individual will have a NRB of £325,000 and an MRA of £175,000. Both will be transferable between spouses and civil partners, giving £1m relief in total.

Direct descendants

The circumstances in which the MRA is available will be limited, however. It will only apply to one residential property, which must be one that the deceased has lived in. For properties valued at over £2m the relief will be reduced. And, crucially, the relief will only be available if the property is left to direct descendants.

Those, like Joyce and Sybil, who do not live in conventional family units with 2.4 children will miss out. While the introduction of the MRA is welcome news, it is not the catch-all solution it first appears to be, and we may see challenges to its limitations between now and when the legislation receives royal assent. And that is before you factor in the increasing house prices we have come to expect. SJ

Kate Johnson is a solicitor at Wedlake Bell