Good News – A huge saving in tax on the Family Home

I am pleased to report that I have had a clear reply from the IHT and Trust department of the HMRC in the UK regarding the new family home nil rate band for the main residence of someone living in Spain; a measure that will potentially reduce the UK Inheritance Tax bill by up to a substantial £140,000.

Most people who were born in the UK will be considered “domiciled” and therefore liable to UK Inheritance tax, even if we have lived outside the UK for many years. From 6th April 2017 a new nil rate band applicable for a family home will be available to reduce the impact of Inheritance Tax in the UK. I have therefore written to HMRC to ask if a family home outside of the UK, where someone is resident in another country, will attract this additional nil rate band.

The good news is that the person responsible for the introduction of this legislation at the HMRC has replied to say

“The new residence nil-rate band will apply if the qualifying conditions are met irrespective of where the residence is located. There is no requirement that the residential property has to be in the UK”

There are three conditions that have to be met to qualify for the new family home nil rate band:

• The property has to be included in the estate of the deceased. It cannot be, for example, a family home that was purchased using a company.
• he person has to be considered UK domiciled.
• The property has to be left to a direct descendant

The new band is very significant to those of us in Spain as the Double Taxation Agreement (DTA) does NOT cover Inheritance Tax. This is because in the UK it is the estate which is taxed but in Spain it is the recipient of the bequest that is taxed. They are, therefore, different taxable entities and no one entity has been taxed twice. In some cases it may, however, be possible to apply for unilateral relief and any Spanish IHT on the family home may also be offset by family home allowances in your particular autonomous community.

So what is this new nil rate band and how does it save us £140,000? Currently, the inheritance tax nil rate band is £325,000 per person. Married couples can leave their estate to each other then claim both allowances on the second death, giving a total nil rate band of £650,000. However, from 6th April 2017, an additional nil rate band of £100,000 per person can be offset specifically against the value of the family home. The allowance will increase to £175,000 per person by 6th April 2020.

With the full family home nil rate band available a married couple will be able to claim in total £350,000. A figure of 40% of £350,000 is £140,000. This is the amount of saving in inheritance tax!!!! It will work in two circumstances too. We will get the benefit if a family home is left to us and if something happens to us the nil rate band will apply to our estate, EVEN IF OUR FAMILY HOME IS IN SPAIN.

The main residence allowance is only available where the bequest is to a direct descendant. Also, if the deceased person’s estate is worth more than £2 Million the allowance is tapered at the rate of £1 for every £2 the value is over £2 Million. If you are in this situation, please contact us for additional planning.