HM Revenue and Customs has stated it wants to get to the bottom of concerns about how property will be able to be passed on after death.
This year’s summer Budget saw the Conservative government announce it will phase in a new residence nil-rate band (RNRB) from 6 April 2017, allowing property to be passed on to a direct descendant.
Today (7 October), HMRC asked the industry if any of the policy design details or conditions need further clarification and for views on what issues and practical difficulties might arise when implementing the proposal and complying with the conditions.
However, the tax office has set the deadline for receiving responses as next Friday, 16 October 2015.
Julia Rosenbloom, director in private client tax services at accountancy Smith and Williamson, said what has not been so far highlighted by the tax office, is that these plans could necessitate individuals retaining important documentation and accurate records well in to their later life.
“As these rules are being introduced to benefit descendants, it is important to retain very detailed records of financial activity, particularly if more than one property transfer is completed, throughout your life.
“This should allow your descendants to easily claim the revised residence nil-rate band allowance, a tax-free sum. However, the concern is that many may not retain detailed records of a property sale that occurred a number of years ago.”
The revised residence nil-rate band is set to begin from next April and will increase from £100,000 in 2017 to 2018, reaching £175,000 in 2020 to 2021 and then increasing in line with CPI inflation.
This allowance is available in addition to the current inheritance tax-free threshold of £325,000.
HMRC’s update included examples on how the residence nil-rate band will work. For example, a widow sells a home worth £400,000 in August 2020 and moves to a home worth £210,000.
At the time of the sale the available RNRB is £350,000 as, had she died at that time, her executors would be able to make a claim to transfer all the unused RNRB from her late husband.
By downsizing, HMRC stated she has potentially lost the chance to use £140,000 or 40 per cent of the available RNRB which could have applied had the more valuable home not been sold.
When the widow later dies in October 2020, the home is worth £225,000 and is left to her children together with £500,000 of other assets. The estate can use an RNRB of £225,000.
However, the widow was eligible for an RNRB of £350,000 had she not downsized. The estate can therefore claim an additional RNRB of 40 per cent of the available RNRB (40 per cent times £350,000) or £140,000. This would give a total RNRB of £365,000 (£225,000 plus £140,000).
But this is more than the maximum available RNRB (£350,000), so the additional RNRB is restricted to £125,000 to ensure that the total amount used does not exceed the maximum available.
In addition, the existing nil-rate band together with any transferable nil-rate band claimed from her late husband’s estate can be applied to the remaining assets in the estate.
emma.hughes@ft.com
