The devil is often in the detail with tax matters – and that’s certainly true for new main residence inheritance rules that stretch the nil-rate band to £1 million.
Everyone assumed the rules would mean that anyone passing on a main home to their beneficiaries at death would receive an extra £175,000 IHT nil-rate allowance and that couples could double up on the relief.
Now, HM Revenue & Customs (HMRC) has released technical guidance outlining how the new rules are likely to work from April 2017.
The surprise is couples who want their children to inherit their home do not have to own a property when they die.
Instead, they still qualify for the relief providing they owned their home on July 8, 2015 and still qualify if they do not own the property when they die.
Points to prove
This rule adds a new layer of complexity to estate planning, as records will have to be maintained to show exactly where someone called their main home on that date, regardless of where they live when they die.
The government has scheduled the relief to phase in over four years, so although a couple dying after April 2017 still benefit, the amount of the relief is reduced to £100,000.
The amount then increases by £25,000 until reaching the full £175,000 relief in the 2020-21 tax year. From April 2021, the relief is index-linked.
Keeping good financial records is important in claiming the relief – the executor of the estate needs to know whether the July 8, 2015 rule comes into play, the rate of relief for the tax year when the deceased dies and their relationship with the beneficiaries inheriting their home.
The last point is important because only children can benefit from the relief.
The note goes on to explain that part disposals, such as selling some land attached to the main home also qualify for the enhanced nil-rate band.
The technical note is just a proposal at this stage – not the final legislation and HMRC is inviting comments on the policy.
The two questions posed are:
- Does the policy need clarification?
- Do tax experts foresee any difficulties with meeting the rules or any difficulties in calculating any IHT due?
Rachael Griffin, head of product law and financial planning at financial provider Old Mutual Wealth believes the policy is too complicated.
“Everyone should get the chance to inherit, not just children,” she said. “These days relationships are more complicated and include step children and children of unmarried partners.”