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Personal tax  •  Probate and Inheritance Tax  •  Tax Planning  •  Taxation

Watch your words when it comes to drafting your will

By RJP LLP on 15 January 2020

This tax year, 2019/2020, the inheritance tax (IHT) main residence nil rate band is increased by a further £25,000. This relief now provides an extra £150,000 IHT nil rate band per person for couples who jointly own their property and leave that property to direct descendants in their will. This is in addition to the existing £325,000 personal IHT allowance. For a qualifying couple, it means that any property that was a main residence, and has a value of up to £950,000, can be inherited tax free by direct descendants. In the 2020/2021 tax year, the allowance will further increase to £175,000 per person, increasing the maximum threshold to £1m.

Clearly, for homeowners in London and the South East this is good news. However the relief is tapered for estates having a total value in excess of £2m, which often requires advance IHT planning.

As with everything in the world of tax, there can also be other unexpected complications, especially when a property has multiple owners. Since property prices are higher than average in this area, this is an increasingly common scenario; many couples decide to downsize and may buy a property as tenants in common with other family members or friends. In this situation, it is important to carefully review the terms detailed in each owner’s will for IHT implications that may unexpectedly affect the relatively new main residence nil rate band.

The case involving Margaret Vincent is an example of this; the wording of her mother’s will had an unforeseen effect on the way inheritance tax on her family home was calculated many years later. It effectively meant she lost the right to her parent’s IHT main residence nil rate band. If you co-own property with other family members, it is worth being mindful of these circumstances and take steps to protect your own allowance if appropriate.

What happened in the Vincent IHT case?

Margaret Vincent’s parents, Mr and Mrs Hadden, bought a retirement property jointly with Mrs Hadden’s brother, Mr Thom. The ownership of the property was divided according to how much each party had invested, with Margaret’s parents owning 3/8th as joint tenants and the remaining 5/8th being owned by Mr Thom as a tenant in common. Each person  made a will; in the case of Mr and Mrs Hadden, they specified that their share of the property would pass to their daughter on the second death, subject to Mr Thom retaining the right to live in the property rent free for the remainder of his lifetime, and being responsible for maintaining the property. Mr Thom’s will specified that his share of the property should pass to Mrs Vincent on his death.

On the face of it, one would expect that when Mrs Vincent inherited the property, she would benefit from her parents’ main residence nil rate band in relation to their share, as they had left it to her. However, because Mr Thom had a right to occupy the property after their death, this was considered by HMRC to be an Interest in Possession, meaning the Hadden’s share of the property then fell within Mr Thom’s estate on his death. Mrs Vincent therefore inherited the entire property, including her parents’ share, from Mr Thom. As she was not a direct descendent of Mr Thom, the main residence nil rate band did not apply.

Although Ms Vincent appealed against HMRC’s ruling, the FTT (first tier tribunal) found that the will was worded to protect Mr Thom and guard against a possible forced sale. Therefore HMRC’s analysis was correct and the main residence nil rate band was not available.

This case demonstrates how important it is to consider inheritance tax fully when making a will, especially when others are involved in property ownership. As demonstrated by this case, even seemingly innocuous requests like allowing a relative to remain in residence after your death could have significant tax consequences.

For more information about estate planning and inheritance tax, please email partners@rjp.co.uk.

 

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31 December 2020 - Review disposals of chargeable assets to avoid a possible CGT increase

Capital gains tax is due to be reviewed by the government and if a CGT rise is announced, the new rates may become effective from the next tax year on 6 April 2021. Take advice now if you are thinking of selling property or have other assets giving rise to a capital gains tax liability.