The Inheritance Tax (‘IHT’) ‘Nil-Rate Band’ (NRB), which is the maximum sum that may be passed upon death to non-tax exempt beneficiaries such as a person’s children, was to be frozen at £325,000 until April 2018. In the Chancellor’s recent Budget Statement it was announced that this will now remain static for a further 3 tax years until April 2021.
However an additional NRB, where a residence is passed on death to direct descendants and known as the ‘Residence NRB’, will be introduced from the 2017-2018 tax year. The Residence NRB was of course anticipated, following on from the general election, and was the subject of my previous article on 29 June 2015.
However it is clear from the details which have now been announced that the Residence NRB is to be more complex than original announcements made in the lead-up to the general election had suggested; as is so often the case ‘the devil is in the detail’. Its introduction is to be phased and there are significant restrictions which will limit its usefulness to most tax-payers, so that it will primarily benefit owners of expensive houses, such as in the London area or possibly some parts of the South East of England.
The Residence NRB will be £100,000 in 2017-2018, £125,000 in 2018-2019, £150,000 in 2019-2020, and £175,000 in 2020-2021, and thereafter increase in line with Consumer Price Index (CPI) from 2021-2022. There will also be a tapered withdrawal of the Residence NRB for estates with a net value of more than £2 million, the withdrawal rate being £1 for every £2 over this threshold.
As with the existing NRB of £325,000, any unused Residence NRB will be transferrable to a surviving spouse or registered civil partner. This will also be available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to the value of the Residence NRB, are passed on death to direct descendants. However this will be subject to a technical consultation, and therefore the details may well change.
From April 2017 IHT will payable on all UK residential property owned by persons being domiciled outwith the UK (‘non-domiciles’), irrespective of their residence status for tax purposes, including property held indirectly through an offshore arrangement. Again, there is to be a detailed consultation later this year.
The government will also bring forward the point at which an individual who is treated as a non-domicile is deemed to be domiciled for IHT tax purposes to 15 out of 20 years. Currently a person has a ‘deemed UK domicile’ if they have their permanent home in the UK at any time in the 3 years before they died, or have been resident in the UK for at least 17 of the 20 tax years up to the date of their death.
If a deceased person is deemed to be domiciled in the UK their estate has to pay UK IHT on all their assets, wherever in the world those assets are situated. However if they are not deemed to be UK-domiciled their estate has to pay Inheritance Tax only on their assets situated within the UK, except ‘excluded assets’. HMRC officially recognises a change of domicile only if there is strong evidence that the person has permanently left the UK and intends to live abroad indefinitely.
It will also regard persons who were born in the UK to parents who are domiciled here as UK domiciled while they remain in the UK. This aligns IHT with the changes to the income tax and capital gains tax regime, and will take effect from April 2017.
If you have any queries regarding the issues referred to in this article please contact Neil Speight in our Private Client Department.