Inheritance Tax Residence Exemption: Even more smoke and mirrors from the 2015 Summer Budget

The fanfare for this Summer’s July Budget trumpeted the arrival of a £1 million IHT exemption for the family home.  The detail is not so clear cut.  Chancellor George Osborne has introduced a new residence exemption from IHT.  It works like this.The new exemption will start in 2017 at £100,000 per person, and rises to £175,000 by 2020/21 tax year.  The arithmetic of the acclaimed £1 million works like this: we all have a nil rate band of £325,000.  Add to this the residence exemption of £175,000 = £500,000.  Multiply by two for both members of a marriage or civil partnership = £1 million.  The Nil Rate Band and the Residence Exemption are transferable on death. Hey Presto! A £1 million exemption from IHT, if you happen to be married and own a house.  But it’s not that much if you are not married (or in a civil partnership) or you don’t (and never have) owned a house.

And it’s no good if you don’t have any children either because the residence exemption only applies to bequests to direct descendants which means children or lineal descendants (this does include step children and adopted children though).

There is some good news for downsizers because anybody who downsized or ceased to own a home after 8 July 2015 will keep the value of the residence relief on equivalent value assets.  Consultations are underway on how this will work.

For the lucky few who own more than one residence, personal representatives and trustees will be able to nominate one home for the residence exemption.  Meanwhile the general Nil Rate Band for IHT is to be stuck at its present level of £325,000 until at least 2021.

The residence relief is also progressively lost on estates worth more than £2 million at the rate of £1 relief lost for every £2 over the £2 million threshold.  This is the value after deduction of any liabilities (like debts) but before any reliefs.  So in 2017/18 the relief will be lost altogether on an estate worth £2.2 million or more, rising to £2.35 million by 2020.

This all raises quite a few questions with regard to farm business tax planning.  Will it be worth separating the farmhouse from the farm in order to capitalise on residence relief rather than rely on Agricultural Property Relief?  Might this be an opportunity for the aging farmer whose home gradually evolves from farmhouse to retirement home?  The new measure adds an interesting new ingredient to the farm succession planning recipe.

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