The Budget announcement about the extension to the nil rate band for inheritance tax is included in clause 9 of the Finance Bill.
Briefly, the additional band of £100,000 is first introduced in 2017/18 and then increases in tranches of £25,000 each year until the maximum of £175,000 is reached in 2020/21. At this point a potential £500,000 will be exempt from inheritance tax for an individual and £1m for a couple.
Bequeathed to Who ?
The additional allowance can only be used against a dwelling house that is bequeathed to a linear descendant – that is a child, grandchild, adopted child or foster child. If the measure is to apply in just a linear fashion it would be fairer if it applied to ascendants as well as descendants – i.e. to bequests to ascendants – that is nephews, nieces and godchildren.
Definition of Residential Property
A residential property interest is defined as an interest in a dwelling house, but there is no definition of dwelling house so it might be presumes to take its definition from the Rent Act 1977. In that event it will include a flat but it would be helpful if this was specified for the avoidance of doubt. It would also make sense if the definition of residence coincided with that used in relation to the principal private residence relief for capital gains tax purposes.
The draft legislation includes interests in residential property via trust structures under which the beneficiary is treated as if they owned the property. This appears to include certain interest in possession trusts, disabled persons trusts, bereaved minor’s trusts and 18 to 25 trusts.
Discretionary trusts would not qualify because the trustees take on legal ownership of the asset in the trust and have discretion around which of the beneficiaries receive which assets, how much each will get and when. The beneficiaries only have the right to be considered by the trustees, who are not legally bound to follow the wishes of the deceased.
The passage of clause 9 should be carefully monitored as the final wording will have important consequences for individuals concerned with estate planning.