Inheritance tax relief for gifts of houses: a major complexity for a small(ish) benefit
The inheritance tax ‘residence nil rate band’ will be available from April 2017. The legislation to introduce this relief is mind-bogglingly complicated but provides an extra relief if you want to leave an interest in a residence to your children, and your estate is under the relevant threshold.
The relief can be claimed where a property is left to your children or issue or their spouses/civil partners. Relief at 40% on a value of up to £175,000 can be claimed after 2020, and on an amount tapering upwards from £100,000 for deaths after 5 April 2017. The property must be inherited by children either outright or in certain types of favoured trusts; or by the other permitted beneficiaries outright or on life interest trusts.
If the relief is not used on the first death, a surviving spouse/civil partner can ‘inherit’ the relief. Using the 2020 figures, the maximum additional relief for a couple is 40% of £350,000. As the existing nil rate band of £325,000 per person can also be used, parents will be able to pass up to £1m in value inheritance tax free. The relief reduces if your estate at death is worth over £2m, and is lost entirely if (again using 2020 figures) your estate is worth over £2.35m, or £2.7m for the survivor of a married couple/civil partners. Careful thought will need to be given on how to ensure that these thresholds are not breached and lifetime giving may be an option.
It is also possible to claim the relief if you have downsized to a less valuable property before death, or have disposed of your property and therefore do not own a property at your death, provided that the lower value property and/or other assets are inherited by the permitted beneficiaries on the correct terms.
There are numerous complexities to the way the legislation works. Tax considerations should never take priority over ensuring that your surviving spouse or civil partner has security after your death, and for most people this is more important than saving some tax. To give maximum flexibility, we can advise on, and prepare, changes to your wills to allow a decision between the various options to be made in the two years after your death.
All this may make your will much more complicated, but could be worth it for a potential Inheritance Tax saving of £140,000. As the thresholds and amounts of relief are to be indexed after 2020, the potential saving may increase in the future.