The Finance Bill 2015 contains the draft legislation on the new inheritance tax break for homeowners; the "residential enhancement" of the nil-rate band for deaths after April 2017. Though this may change before the Bill becomes law later in the year, it gives some clarity on how the relief is intended to work.
From 2017 estates will benefit from an additional nil-rate band of £100,000 (rising to £175,000 by 2020) where the deceased's residence is left to direct descendants. This relief is in addition to the £325,000 nil-rate band already available. This "residence nil-rate band", or "RNRB", will be available on outright gifts of the property by Will, or where the house is left to children on specific trusts.
The residence (whether freehold or leasehold) must be owned at the date of death, and must have been the deceased's residence at some point during their ownership. If there is more than one residence, the deceased's executors may nominate which one should use the RNRB. It appears that there is no limit on the size of garden or grounds which qualify for the relief.
If the main residence passes to a surviving spouse (which would mean that no inheritance tax is charged), who then leaves it on their death to their children or grandchildren, the un-used RNRB may be rolled over on the second death, alongside the transfer or the main nil-rate band. It is this provision that is behind the headlines that there will be a £1m nil-rate band by 2020.
Where a person's whole estate is valued at over £2m, there is a scaling back of the RNRB depending on how far over the £2m threshold the estate comes. For example, in 2017 an estate valued at over £2.2m would not qualify for the RNRB, but below that the relief is reduced proportionately.
The key for testators is to make sure that their main residence is dealt with properly under their Wills to secure the relief. For instance, a gift of an estate including the main residence on discretionary trusts for children and grandchildren may not qualify for the relief, and should be reviewed, particularly in light of the consultation scheduled for the autumn regarding deeds of variation.