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8 July 2015

Inheritance tax main residence nil rate band

From April 2017 an inheritance tax Main Residence Nil Rate Band (MRNRB) will be introduced to allow a residential property that has at any point been an individual’s home to be passed free of IHT to direct descendants. Direct descendants are children, including step children, adopted or foster children, and their lineal descendants.

The MRNRB will be introduced gradually, starting at £100,000 per person in 2017/18 increasing to £125,000 in 2018/19, £150,000 in 2019/20 and reaching £175,000 in 2020/21. It will then increase inline with CPI. The existing nil rate band of £325,000 will remain frozen until 2020/21.At this point the total IHT nil rate band for a husband and wife will be up to £1million.

As with the current nil rate band, the MRNRB will be transferable between spouses if not used on the first death and a claim will need to be made on the second death. Where an individual owns more than one qualifying property the executors will need to nominate to which house it will apply.

For taxpayers whose net estate exceeds £2million the MRNRB will be tapered by £1 for every £2 meaning that from 2020/21those with net estates in excess of £2.35million will not benefit from this measure. 

The MRNRB will also be available where a person downsizes or sells a home on or after 8 July 2015 and assets of an equivalent value up to the MRNRB are passed on death to direct descendants. This element will be subject to consultation as to how it will work in practice.

Changes to Inheritance tax charges on trusts

Trust changes, previously the subject of consultation, are to be legislated in the summer Finance Bill 2015 and will apply to ten year and exit charges arising after the date of royal assent.

Where property is added to more than one relevant property trust on the same day, and after the commencement of those trusts, it will be taken into account when calculating the ten year and exit tax charges for each trust. This will apply to all additions to trusts after 10 December 2014, regardless of when the trust was created. This will end the benefit of pilot trusts, whereby an individual could set up a number of trusts on different days, with say £10, each with their own nil rate bands. Substantial assets would then be added at a later date.

These changes will not apply if the additions to the trusts happen through a Will executed before 10 December 2014 and where the death occurs before 6 April 2017.

To simplify the calculation of the ten year and exit charges it will no longer be necessary to take account of any non-relevant property.

Where trustees are looking to claim conditional exemption on heritage property at the date of a ten year charge, they currently have to agree the claim before the date of the ten year charge. Going forward they will have two years from the date of the ten year anniversary to make the claim. This puts them in the same position as executors making a claim on death.

The so called ‘Frankland trap’ will also be removed for property settled by Will. This will enable appointments to be made out of the trust within three months of death in favour of the deceased’s spouse or civil partner. Previously any such appointments in this period would not qualify for spouse exemption or CGT holdover relief.


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