An extra £175,000 inheritance tax allowance on the family home will be phased in from April 2017. This will combine with the original allowance of £325,000 to give some individuals a £500,000 allowance when leaving property to children and descendants on death and a combined £1m for spouses and civil partners.

Inheritance tax is a tax on the value of the assets that one leaves behind on death and on some gifts made during one’s lifetime. However, a certain amount can be passed on tax- free and this amount is known as the ‘nil rate band’.

For the current tax year 2015/16, every individual is entitled to a nil rate band allowance of £325,000. The nil rate band has remained at this level since 2010/11 and, as announced in the summer Budget last week, it will remain frozen at that level until at least 2020/21.

The Chancellor announced that there will be an increase in the inheritance tax nil rate band to enable individuals to pass at least some of the value of their main residence on to their descendants on death without a tax charge. This follows the Conservative Party’s resurrection of its earlier pledge to increase the nil rate band to £1m, albeit significantly repackaged.

The policy objective is to “[…] reduce the burden of [inheritance tax] for most families by making it easier to pass on the family home to direct descendants without a tax charge”.

The “main residence nil rate band” will take effect from 6 April 2017 in the sum of £100,000. This sum is set to increase by £25,000 each year thereafter, stopping at £175,000 in 2020/21. From 2021/22 onwards the band will increase in line with the Consumer Price Index.

The main residence nil rate band is available to set against the value of the deceased’s property where that property is left to his/her “direct descendants” which the government has defined as a child (further defined to include a step-child, adopted child or foster child) and their lineal descendants. The allowance is restricted to property that has been the residence of the deceased at some point during their lifetime, so it would not apply to a buy-to-let property, although it could apply to a property which used to be the deceased’s residence, but which was let at the date of death.

In the event that there are two potentially qualifying properties, the deceased’s personal representatives can elect to which one the main residence nil rate band will attach. Accordingly, the property to which the main residence nil rate band attaches does not have to be the deceased’s principal residence either as a matter of fact or in accordance with the rules applicable to the making of a principal private residence election for capital gains tax purposes.

It would have made sense to apply this allowance to homes that qualify for principal private residence relief, although we accept that this would preclude homes that are not lived in because, for example, the owner was living in a care home. Certain periods of absence would, therefore, have to be ignored to arrive at an equitable result in line with the policy objective ora very tightly framed test for a ‘family home’ will need to be devised.

The Summer Finance Bill 2015 (to be known as the ‘Finance (No.2) Act 2015’ upon Royal Assent) includes provisions that enable the relief to apply where a person lives in job-related accommodation and owns a house in which they “intend to live in due course”. In those circumstances, the mere fact that the individual may not, as at the date of death, have ever lived in the house in question, is not fatal to their claim. Instead, their personal representatives must establish an intention, albeit unfulfilled, to live in the house at some point in the future.

The legislation does not offer any guidance as to what evidence of the deceased’s intent will be sufficient for these purposes and we will have to wait to see how this develops in practice. Aside from absences pertaining to the provision of job related accommodation, there are no other let ups.

If the value of the property in question does not utilise all of the main residence nil rate band, it will not be possible to carry across any unused allowance to another property. It is therefore important that the personal representatives elect wisely or they could potentially waste part of the allowance and face claims by those prejudiced i.e. the beneficiaries of the estate.

It is not uncommon for people to downsize to a smaller and less valuable property, or even to cease to own a property before their death. When one downsizes or ceases to own a home on or after 8 July 2015, the main residence nil rate band would still be available provided the smaller replacement property and/or the proceeds of the sale of the property (or, potentially, whatever they subsequently become) are passed to the deceased’s descendants. Quite how this will work in practice remains to be seen and we can, already, think of a number of pitfalls that will need to be appropriately framed if uncertainty anddisputes are to be avoided. There will be a consultation on this point in the autumn.

The main residence nil rate band will not be available to all, since the government does not want to be seen to be benefiting those considered to be ‘better off’. The allowance will be reduced for estates worth more than £2m at a withdrawal rate of £1 for every £2 over that threshold. The £2m threshold is arrived at by deducting liabilities but before applying any applicable reliefs or exemptions (including the ordinary nil rate band, spouse/civil partner exemption, business and agricultural property reliefs etc).

The tapering of the allowance means that no relief is available for estates with a net value, in 2020/21, of £2.35m or more (or £2.7m on the death of a surviving spouse where the full main residence nil rate band is available to be transferred to the survivor – see below).

Many people arrange their wills so that their property or a share in a property passes into a trust set up for the benefit of descendants as opposed to passing to them outright. The legislation states that the main residence nil rate band will apply to certain types of trust only. These include trusts where the descendant is treated as if they own the property themselves (e.g. a qualifying life interest), and trusts for minor descendants and those under the age of 25. Accordingly, if a discretionary trust is used, the allowance will be lost.

Where someone leaves everything they own to a surviving spouse or civil partner, the value of the estate inherited is fully exempt from inheritance tax by virtue of spouse or civil partner exemption. This means that the first to die has not used any of their own nil rate band and, since October 2007, the unused proportion of their nil rate band is available to transfer or, more accurately, increase the nil rate band of the second spouse or civil partner when they die.

Like the original nil rate band, the main residence nil rate band will be transferable between spouses and civil partners where the second spouse or civil partner dies on or after 6 April 2017 irrespective of when the first spouse dies. For example, if the second death occurs in the 2020/21 tax year, a husband and wife can combine their nil rate bands making a combined allowance of £1m made up of two original nil rate bands of £350,000 (£650,000) and two main residence nil rate bands of £175,000 (£350,000).

We suspect that this additional allowance will, as a concept, prove popular with the general public. However, the devil is very much in the detail and even before this autumn’s consultation has commenced, the application of this allowance seems, at best, to be very complicated and potentially very confusing. It would have been far easier for the government to increase the original nil rate band to £500,000 per person which, when ‘transferred’ between spouses and civil partners, would result in an enhanced nil rate band of £1m and very little in the way of additional administrative costs for the Treasury. Too bold a move perhaps for a government keen to avoid accusations of favouring the wealthier members of society.