Downsizing tax legislation would be good!

23 September 2015

Gary Heynes

It’s unfortunate that politics often overrides common sense with the result that convoluted legislation is needed to make a simple change. 

One example is the positive tax announcement in the Summer Budget of the introduction of a further Inheritance Tax nil rate band for main residences (RNRB). The current nil rate band is £325,000 and covers all assets chargeable to Inheritance Tax (IHT); the additional RNRB, which will be phased in, will reach £175,000 by 2020-21, will only be available to cover main homes and only where they are passed to children. This will allow a couple to ensure that a home up to £1m is exempt from IHT.

The Government also intends to extend the additional nil rate band in circumstances where individuals downsize and it has recently published a consultation on how this can be achieved. On the face of it, this seems fair as without a 'downsizing relief' those with higher value homes may be disadvantaged with a higher IHT bill if they downsized and they may therefore be inclined to clog the property market by staying put in their large house.

So HMRC’s consultation focuses on the main concerns of clarity and the issues and practicalities of the new rules.

Two thoughts on this:

  1. The rules do seem to give the ability to upsize before downsizing so that the additional relief can be banked. For a couple the value of the additional tax saving of £140,000 (£350,000 at 40 per cent) might well make it worthwhile; and
  2. Aside from tax relief, many might consider property to hold values more than freeing up cash and investing elsewhere, so end up not moving anyway.

Complexity seems difficult to avoid in drafting well intended rules, particularly when trying to ensure they target a very niche area and it seems that this piece of legislation is only designed to ensure, politically, this is not a tax 'giveaway' which has taken preference over simplified legislation. Perhaps the Government could just be bold and raise the nil rate band to £500,000 and avoid the need for consulting on what will become yet another lengthy set of rules? That might be common sense, but may not be seen as good politics.