Legal update: court is left unconvinced by ‘Purdah’ argument in judicial review proceedings
In 2007, the Conservative Party made much of a party pledge in its manifesto to increase the Nil Rate Band for inheritance tax to £1m. In July 2015, having been elected to form a majority government they announced the introduction of a Residence Nil Rate Band (RNRB). Now that more of the detail has emerged in relation to this policy announcement, the reality does not match the expectations of many and some of the details are still unclear.
What do we know?
Currently, Inheritance tax (IHT) is payable on death at the rate of 40% on the value of an individual’s net estate above the current Nil Rate Band (NRB) of £325,000. On the death of a surviving spouse or civil partner, where the NRB of the first to die was not used, it is possible to transfer this to the survivor’s estate so that the figure doubles to £650,000.
One important thing to note is that the new RNRB does not apply to deaths until 6 April 2017 onwards and the full £1m benefit will not be applicable until 2021, by which time the proposed changes will have less of a financial impact than envisaged if house prices continue to increase in value in the way they have historically.
How does it work?
From 6th April 2017, an additional £100,000 RNRB will be available on top of the £325,000 NRB. This sum will be increased by £25,000 per year so that by 2020/21 an additional £175,000 will be available. The NRB will remain frozen throughout this period. The net effect will be that for those spouses and civil partners who meet various conditions they can transfer the NRB and the RNRB between them so that their combined total NRB’s and RNRBs will be £1m (£325,000 and £175,000 (£500,000) each.
What are the conditions?
As you might expect, it’s not straightforward as there are a number of conditions that need to be met. Firstly, the deceased spouse or civil partner must have had a residence at death, or at least, have had a residence at some point since 8th July 2015 when the policy was announced. Where someone has “downsized” and moves to a less valuable residence, details about how this will work have yet to be published. Also, the definition of “residence” is not fully clear, other than it is a requirement that the deceased lived in the property at some point during their lifetime. Accordingly, a pure investment property will not qualify. If a deceased had more than one residence, it is possible for the personal representatives of the estate to elect which residence applies for the RNRB. It is not possible, however, to divide the RNRB between different residences.
Who can benefit from the RNRB?
The residence of the deceased must be inherited by “direct descendants”, which fits with the Tories mantra of benefitting “families”. Direct descendants are defined as children, grandchildren, step children, adopted children. The definition also covers spouses and civil partners of lineal descendants, in addition to widows, widowers and surviving civil partners who have not remarried.
Does the RNRB apply to all estates?
The RNRB is restricted if the value of the estate exceeds a threshold of £2m. This may have been inserted to counter arguments that these provisions only benefit middle class tory voters with valuable properties. For every £2 that the value of the next estate exceeds the £2m threshold, the RNRB available will taper by £1. This means that for deaths after 6th April 2017, when the RNRB will be £100,000, where an estate is valued at over £2.2m (or £2.4m where the unused RNRB has been transferred to a surviving spouse or civil partner) it will taper to nothing.
Some of the details are still unclear but clearly advice needs to be taken to review existing Wills to ensure they are fit for purpose, especially when the new RNRB provisions become effective from 6th April 2017.
Unfortunately, the much hyped election promise in 2007 of a £1m NRB has not materialised, and whilst a step in the right direction, the RNRB is likely to be of limited financial benefit and prove to be overly complicated to deal with in practice. It wouldn’t surprise me if there were future tinkering in subsequent budgets that will mean spouses, and civil partners will need to continue to review their testamentary arrangements.
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