George Osborne delivered the first Budget of this Parliament on Wednesday 8 July 2015. The popular press gleefully proclaims that he has introduced a £1m inheritance tax (IHT) nil rate band for married couples or those in civil partnerships. The truth is that the IHT nil rate band is currently frozen at £325,000 and will remain so until April 2021.
IHT and the Main Residence Nil Rate Band (MRNRB)
What will be introduced is an additional nil rate band where a residence is passed on death - but only to direct descendants such as a child or a grandchild. Initially this will be £100,000 in the tax year 2017/2018 increasing each tax year by £25,000 to £175,000 in tax year 2020/2021. From 2021/22 it will increase in line with CPI. This additional MRNRB may only be used in respect of one residential property providing that at some point it was the residence of the deceased.
As with the existing nil rate band, any unused MRNRB may be transferred to a surviving spouse or civil partner. If a person downsizes or no longer owns a home from now on, then assets of an equivalent value which are passed on death to direct descendants will also benefit from any unused MRNRB. However, the precise mechanics of how this will work are not clear and will be determined after a technical consultation to be introduced in Finance Bill 2016.
Until the legislation is introduced and the practicalities resolved, it is worth remembering that a Will may be varied within 2 years of the date of death. Where a nil rate band has been left on death direct to issue, it may be worth holding fire to determine whether a Will variation might be beneficial to take advantage of the new rules once they are in place.