Finance Bill 2016, clause 82 Inheritance Tax: Increased Nil Rate Band (Downsizing)

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Darren Collins
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Ref: ST 8 June 2016 Via email only: danka.wigley@hmrc.gsi.gov.uk Dear Danka Finance Bill 2016, clause 82 Inheritance Tax: Increased Nil Rate Band (Downsizing) Policy Objective Paragraph 1.

1 Ref: ST 8 June 2016 Via only: danka.wigley@hmrc.gsi.gov.uk Dear Danka Finance Bill 2016, clause 82 Inheritance Tax: Increased Nil Rate Band (Downsizing) Policy Objective Paragraph 1.53 of the 16 March 2016 OOTLAR states: As announced at Summer Budget 2015, legislation will be introduced in Finance Bill 2016 to ensure that the residence nil-rate band will be available in cases where a person downsizes or ceases to own a home and other assets are passed on death to direct descendants. Following consultation, the draft legislation will be revised to clarify when a disposal has occurred, to ensure that certain disposals made by trustees will also be taken into account, and to ensure that the provisions relating to cases involving conditionally exempt assets work as intended. Although the legislation now contained in Schedule 15 has been revised from the initial 9 December 2015 draft, it does not meet the policy objective stated above: it still does not take account of certain disposals made by trustees. This also means that, when a home is held under normal trust terms, the wider policy aim, as articulated in the 18 September 2015 Technical Note that the government intends that the new RNRB should not be introduced in such a way as to disincentivise an individual from downsizing or selling their property, is not achieved. In turn, there is likely to be an adverse impact on the property market. Does the commitment that the legislation will be revised mean that further amendments will be introduced during the passage of the Bill through parliament?

2 The problem It appears to us that the legislation in Schedule 15 as currently drafted is deficient in one particular respect in that no provision has been made for downsizing when the home is held as a trust interest (for example, and especially, an Immediate Post-Death Interest ( IPDI )). The typical scenario would be that the home (solely owned by husband) was left on a life interest basis to his widow, with remainder over to his children. The widow goes into care and the trustees wish to sell the property. An IPDI is becoming increasingly common to safeguard the interests of children from a first marriage when their parent enters into a second. It seems that the widow s estate would be unable to benefit from the downsizing rules, and would have no RNRB. This is because the new subsections 8H(4A) to (4C) of IHTA 1984 provide that a qualifying former residential interest in relation to [a] person only arises if that person disposes of a residential property interest in a dwellinghouse. (There also has to be a nomination (or in some cases two nominations) by the person s PRs.) A disposal by trustees of the dwelling-house in which the person has an Interest in Possession is not a disposal by the person, and so cannot qualify. Possible solution We suggest that one approach to remedy the position might be to expand the definitions in section 8H to the effect that: A residential property interest (subsection 8H(2)) also encompasses an interest in possession as set out in subsection 8J(5) Subsections (4A), (4B) and (4C) state where a person or trustees dispose of a residential property interest... Other difficulties In our submission of 2 February 2016 on the original draft proposals (copy attached) we pointed out two problems which have not been addressed. The first was that of allowing only a single interest to be eligible for downsizing relief. In the example given above, the surviving spouse has an IPDI in the entire property. But in many cases the survivor may have an IPDI in a part-share, and their own outright ownership as tenant-in-common of the other part-share. In those circumstances on the survivor s death draft section 8H(4C)(b) requires the personal representatives to nominate one (and only one) of those interests as the qualifying former residential interest. Therefore only the survivor s 50% of the value of the property will be eligible when calculating their RNRB. This seems at odds with the purpose of the legislation, and is particularly strange when, under section 8H(3) of the original legislation, two interests (including an IPDI) could be taken into account for purposes of the basic RNRB. P/tech/subsfinal/ST/2016 2

3 The second anomaly arises from new section 8FE which sets out how the value of the RNRB which has been lost as a result of downsizing or disposal of a residence (the lost relievable amount ) should be calculated. The effect of subsection (3) is to freeze the value of the allowance at its value at the time of the downsizing. By contrast, the carry-forward mechanisms for both the Transferable Nil-Rate Band (section 8A) and the basic Brought Forward RNRB (section 8G) allowable on the death of a surviving spouse or civil partner operate on the basis that the allowance on the survivor s death is increased by the percentage that the original allowance was unused. The adoption of a different mechanism appears anomalous and adds further complexity. Conclusion We remain willing, as always, to work with you to ensure that this complex legislation can be made to operate as simply as possible, for the benefit of both taxpayers and HMRC. Yours sincerely Chris Williams Chair, Succession Taxes Sub-committee The Chartered Institute of Taxation The Chartered Institute of Taxation (CIOT) is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it taxpayers, their advisers and the authorities. The CIOT s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer. The CIOT draws on our members experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work. The CIOT s 17,500 members have the practising title of Chartered Tax Adviser and the designatory letters CTA, to represent the leading tax qualification. P/tech/subsfinal/ST/2016 3

4 Appendix 1 Introduction IHT Increased Nil-Rate Band - Downsizing Consultation on draft clause 44 Finance Bill 2016 Response by the Chartered Institute of Taxation 1.1 This legislation provides that an estate will continue to qualify for an increased residence nil rate band (RNRB) for inheritance tax (IHT) when an individual downsizes from a higher value residence to a lower value one or ceases to own a residence, and other assets are left on death to direct descendants. The Schedule sets out the conditions for the entitlement to the additional amount (the downsizing addition), the effect of the addition, and how the amount of the residence nil rate band that has been lost as a result of downsizing or disposal should be calculated. The change will apply for deaths on or after 6 April 2017 and for downsizing moves or disposals on or after 8 July Executive summary 2.1 This draft legislation is even more complex than the original RNRB provisions and will require on-line calculators to be practicable. It runs counter to the Government s commitment to tax simplification. 2.2 The policy objective is not met where an individual has more than one interest in a property. 2.3 There is an anomaly in that the allowance is frozen in value (rather than being carried forward on a proportionate basis) when downsizing occurs. 2.4 A straightforward, alternative mechanism would be, for the purpose only of calculating the available relief, to allow the value of a former residence to be substituted for the value of the actual residence on death, where there has been downsizing. 3 Complexity 3.1 We commented on the Technical Note issued on 18 September 2015 about the downsizing proposals that this additional legislation (on top of the 9 pages of dense legislation required for the RNRB itself) would introduce yet further complication to an already complex part of the IHT regime. The legislation as currently drafted, is even more complex and lengthy (another 8 pages) than we had feared and runs counter to the Government s commitment to tax simplification. 3.2 We believe that the legislation will work in practice only if HMRC make available comprehensive (and comprehensible) Guidance and on-line calculators. What support do HMRC intend to provide for personal representatives and their advisers? P/tech/subsfinal/ST/2016 4

5 3.3 We question whether these complex rules are appropriate and proportionate for measures that will apply in a relatively small number of cases. At paragraph 6 we suggest a simpler, alternative approach. 4 Policy objective multiple interests 4.1 The Explanatory Note states that the aim of this legislation is to ensure that an estate will continue to qualify for an increased residence nil-rate band for inheritance tax when an individual downsizes from a higher value residence to a lower value one or ceased to own a residence and other assets are left on death to direct descendants. However that objective is not achieved where an individual has more than one interest in a property (draft section 8H(4C) Inheritance Tax Act 1984). 4.2 It is not unusual for a residential property to be owned in equal shares by a married couple/civil partnership as tenants in common. On the first death, the deceased leaves their share in the house on a life interest basis (an immediate post death interest) for the benefit of the survivor, with the reversion in favour of their children. The survivor would then hold their own 50% interest and a further 50% IPDI. In due course, with the trustees consent, the survivor downsizes. 4.3 In those circumstances on the survivor s death draft section 8H(4C)(b) requires the personal representatives to nominate one (and only one) of those interests as the qualifying former residential interest. Therefore only the survivor s 50% of the value of the property will be eligible when calculating their RNRB. This seems at odds with the purpose of the legislation, and is particularly strange when, under section 8H(3) of the original legislation two interests (including an IPDI) could be taken into account for purposes of the basic RNRB. 5 Calculation anomaly 5.1 Draft section 8FE sets out how the value of the RNRB which has been lost as a result of downsizing or disposal of a residence (the lost relievable amount ) should be calculated. The effect of subsection (3) is to freeze the value of the allowance at its value at the time of the downsizing. Whilst that is clear and the figures immediately ascertainable, the effective value of the allowance to be taken into account at a later death, possibly many years hence, will be diminished by inflation. By contrast, the carry-forward mechanisms for both the Transferable Nil-Rate Band (section 8A) and the basic Brought Forward RNRB (section 8G) allowable on the death of a surviving spouse or civil partner operate on the basis that the allowance on the survivor s death is increased by the percentage that the original allowance was unused. The adoption of a different mechanism appears anomalous and we seek clarification that this is intentional. P/tech/subsfinal/ST/2016 5

6 6 Alternative mechanism 6.1 We believe that a similar outcome could be achieved through simpler mechanism. We suggest that, for the purposes of determining the available RNRB, where an individual does not own a residence with a value above the default allowance, their personal representatives be permitted to nominate, by way of substitution, one former residence. Ideally, and to meet the policy objective that a downsizer should not be disadvantaged, the value of the former residence should be CPI adjusted from disposal to the date of death. 6.2 In such cases the available RNRB could be calculated simply by reference to the (adjusted) sale price of the nominated former residence, and the closely inherited test could be met to the extent that value from the estate was closely inherited. 6.3 Adopting this approach would mean that the downsizing provisions would not add significantly greater complexity to the already complex legislation to determine the amount of RNRB available to an estate. P/tech/subsfinal/ST/2016 6

The Residence Nil-Rate Band and the Downsizing Provisions:

The Residence Nil-Rate Band and the Downsizing Provisions: March saw the start of the 2016 Finance Bill s passage through Parliament. Mired in controversy within hours of the Chancellor sitting down after