When former chancellor George Osborne announced significant changes to Inheritance Tax (IHT) in last summer's Budget speech, the move had been much anticipated. But rather than simply raising the tax-free threshold for everyone, he announced a new allowance specifically for those who own their home and want to leave it to their children or grandchildren.


For these homeowners, a new residence nil rate band allowance (RNRB) will be introduced from April 2017. However, as is often the case with such announcements, the devil is in the detail...

Under the new rules, when a person leaves a residential property to direct descendants there will be an additional nil-rate band for inheritance tax purposes. However, it only applies to one residential property which was a residence of the tax payer or the proceeds of such property after down-sizing, and it will be introduced from April 2017, increasing each year through to 2020.


Direct descendants include natural and adopted children, grandchildren and remoter descendants. It also includes step children and foster children, and the spouse or civil partner of a living or dead direct descendant, as long as any surviving spouse or civil partner has not remarried. For the purpose of RNRB, adopted children are treated as being the children of both the adoptive and the natural parents. Direct descendants do not include brothers and sisters or nieces and nephews.


The RNRB is introduced in April 2017 at £100,000 rising to £175,000 by 2020 and thereafter subject to indexation. The £325,000 nil-rate band will continue to be available on any qualifying assets without restriction as to who inherits. Both the £325,000 nil-rate band and the Residential Nil-Rate

Band will be transferable between spouses even if the first dies before 2017.


So, from 2017, a married couple or civil partners who satisfy the criteria on the “property passing to descendants” rule will have a potential combined allowance of £850,000 rising to £1 million by 2020; up from the current level of £650,000, with a resulting saving of inheritance tax of £140,000 at the maximum level. A single person satisfying those criteria will have a £500,000 allowance by 2020, up from £325,000, giving a potential tax saving of up to £70,000.


High value estates will not qualify for the additional relief, which will be tapered away for estates valued at over £2 million, at a rate of £1 for every £2 over the £2 million threshold. It means that the RNRB will be completely lost on an estate worth more than £2.2 million in 2017/18, rising to £2.3 million from 2020/21 highlighting the need for careful planning to ensure the tax saving.


There are provisions in place for those who have downsized their property and the government is clarifying the process in relation to the treatment of trusts.


As can be seen from the above the "£1 million allowance" is less simple than we were led to believe.

The above is a flavour of the new legislation but the importance of specific advice to clients on a case by case basis has never been more relevant.