Inheritance Tax rules on downsizing ‘too confusing’

Analysts have criticised HM Revenue & Customs’ (HMRC) guidelines on how people can downsize their home but retain the value of their previous residence for an Inheritance Tax (IHT) reduction.

Commentators have described the tax authority’s guidance as “impenetrable”, claiming that HMRC has offered up a “complex solution to what should have been a relatively straightforward problem”.

Specifically, the Institute of Chartered Accountants in England and Wales (ICAEW), has said that the new guidance, entitled How downsizing, selling or gifting a home affects the additional Inheritance Tax threshold, is only “slightly less impenetrable” than the legislation itself.

In addition, the accountancy body has highlighted the fact that real-life complications involving estates valued above £2 million, and nil rate and transferable rate bands, are ignored in the explanatory note from HMRC.

So, what does the new guidance actually mean?

The new guidance for the Residence Nil Rate Band (RNRB), plus two related pieces of updated IHT guidance on trusts and Inheritance Tax and transferring unused tax-free thresholds, have been published to help individuals decipher the complex rules governing the RNRB system.

The guidance basically explains that, under the new rules, when someone has sold, given away or downsized to a less valuable home before they die, their estate may be able to get an extra IHT threshold, known as a ‘downsizing addition’, provided three conditions apply. These are that:

  • The person sold, gave away or downsized to a less valuable home, on or after 8 July 2015
  • The former home would have qualified for the additional threshold if they had kept it until they died; and
  • Their direct descendants inherit at least some of the estate.

However, even HMRC admits that many people will need professional help and advice to get the maximum benefit from these rules and associated downsizing provisions, particularly where trusts have been used, stating that the guidance only explains the very basic rules.

For more information about MD Consulting’s Inheritance Tax planning services and how we can help you, please contact us.

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