In the depths of The Conservative Party’s manifesto in advance of the 2010 general election, there was a promise that “we will raise the inheritance tax threshold to £1 million to help millions of people who aspire to pass something on to their children”. A bold stance which never, it appeared, made it out of the starting blocks once the coalition with The Liberal Democrats was formed.

Five years later, the manifesto in 2015 promised “to take the family home out of tax by increasing the effective inheritance tax threshold for married couples and civil partners to £1 million”. Whilst, on first glance, this simply appeared to be a restatement of the same promise made prior to the 2010 election, the devil was, as is ever the case, in the detail.

The phrase “effective inheritance tax threshold” was, in many ways, an incredibly clever use of grammar. Rather than raising the actual inheritance tax threshold (as previously promised), a new “residence nil rate band” was introduced which allowed an additional nil rate band - which will eventually reach £175,000 - to be used against the family home. Therefore, instead of a simple promise of “raising the inheritance tax threshold to £1 million” we are left with a position where the Government is “raising the inheritance tax threshold to £1 million provided that the deceased is a homeowner, married or in a civil partnership and at least one of the couple survives until April 2020” which doesn’t scan quite so well… ”.

The legislation imposes a further limit on the availability of the mythical £1 million in that there is to be a tapered withdrawal of the residence nil rate band for estates with a net value of more than £2 million. This will be at a withdrawal rate of £1 for every £2 over this threshold. In other words, an estate worth £2.2 million in 2020 will only receive a maximum residence nil rate band of £75,000. Importantly for farmers, “net value” in this context includes the value of all assets – it does not allow a reduction in value for any assets that qualify for either agricultural or business property relief. Therefore, it will not take a huge amount of acreage for many farmers to reach the £2 million limit.

The value of the estate includes property “owned or deemed to be owned” by the farmer. Therefore, property enjoyed as a beneficiary of an interest in possession trust or an immediate post-death interest will certainly be included, as will property that has been gifted subject to a reservation of benefit.

The residence test

In order for a deceased’s estate to benefit from the residence nil rate band, the deceased must leave their interest in his or her main residence to their children or remoter descendants. This can cause an obvious issue for a tenant farmer. It may well be that a tenant farmer owns another residence that can attract the residence nil rate band if it is left to their descendants. However, if the deceased was not living in that property at the time of their death then the executors must show that the deceased had lived in it as their residence at some point during their ownership, which may be difficult. The legislation appears to suggest that the property need not be the deceased’s “main” residence but there does appear to be a requirement of some form of permanence of occupation.