Clause 82 and schedule 15 ensure that the residence nil-rate band for inheritance tax will continue to be available when an individual downsizes or ceases to own a home. The clause builds on the provisions in the Finance Act 2015, which introduced a new residence nil-rate band, by creating an effective inheritance tax threshold of up to £1 million for many married couples and civil partners by the end of the Parliament, making it easier for most families to pass on the family home to their children and grandchildren without the burden of inheritance tax.
The combined effect of this package will almost halve the number of estates expected to face an inheritance tax bill in future. The Office for Budget Responsibility now forecasts that 33,000 estates will be liable for inheritance tax in 2020-21. As a result of this package, 26,000 estates will be taken out of inheritance tax altogether and 18,000 will pay less.
We recognise that people’s circumstances change as they get older and that they may want to downsize or may have to sell their property. We do not want the residence nil-rate band to act as a disincentive for people thinking about making such changes. That is why we announced in the summer Budget that anyone who downsizes or ceases to own a home on or after
The extra residence nil-rate band or downsizing edition will only be available for one former residence that the deceased lived in. Where more than one property might qualify, executors of an estate will be able to nominate which former residence should qualify. The approach reduces complexity and ensures flexibility in the system.
The Government have tabled seven amendments to schedule 15 to ensure that the legislation works as intended in certain situations that are not currently covered by the downsizing provisions. Amendment 15 caters for situations in which an individual had more than one interest in a former residence, to ensure that they are not disadvantaged compared with those who owned the entire former residence outright. Amendment 16 clarifies the meaning of disposal in situations where an individual gave away a former residence but continued to live in it. Amendment 19 ensures that where an estate is held in a trust for the benefit of a person during their lifetime, a disposal of that former residence by the trustees would also qualify for the residence nil-rate band.
Amendments 13, 14, 17 and 18 make minor consequential changes to take into account the other amendments. Clause 82 and schedule 15 will help to deliver the Government’s commitment to take the ordinary family home out of inheritance tax by ensuring that people are not disadvantaged if they move into smaller homes or into care. That commitment was made in our manifesto and I am pleased to deliver it fully with this clause.
As we have heard from the Minister, clause 82 and schedule 15 provide that the inheritance tax transferrable main residence nil-rate band will apply to an estate even when somebody downsizes. As the Tax Journal’s commentary on the Bill concisely explains, schedule 15 in particular contains provisions to ensure that
“estates will continue to benefit from the new residence nil rate band even where individuals have downsized or sold their property, subject to certain conditions. The residence nil-rate band is an additional transferable nil rate band which is available for transfers of residential property to direct descendants on death. The additional relief will be available from
My hon. Friend the Member for Hayes and Harlington and I tabled amendments to leave out clause 82 and schedule 15 today—we will therefore oppose the clause—although they were not selected for debate.
The Government’s objective seems to be that
“individuals may wish to downsize to a smaller and often less valuable property later in life. Others may have to sell their home for a variety of reasons, for example, because they need to go into residential care. This may mean that they would lose some, or all, of the benefit of the available RNRB. However, 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.”
If we go back a couple of steps, at summer Budget 2015 the Government announced that there would be an additional nil-rate band for transfers on death of the main resident to a direct descendant set at £100,000 and subject to a taper for an estate with a net value of more than £2 million. The band will be withdrawn by £1 for every £2 over the threshold. During the passage of the Finance Act 2015, which introduced the additional nil-rate band, the Opposition spokesperson, my hon. Friend Barbara Keeley, stated:
“We have been clear that we believe that the focus of tax cuts should be on helping working people on middle and low incomes and on tackling tax avoidance…the Treasury has admitted that 90% of households will not benefit from the Government’s inheritance tax policy, so we should be clear about the part of society we are talking about.”
She went on:
“The priority for the Government, we believe, should be helping the majority of families and first-time buyers struggling to get a home of their own. That is why Labour voted against the Government’s inheritance tax proposals in the July Budget debate. The Treasury estimates that the changes to inheritance tax will cost the Exchequer £940 million by 2020-21—nearly £1 billion.”––[Official Report, Finance Public Bill Committee,
I echo those comments in the light of the measure today. We simply do not believe that expanding the conditions in which inheritance tax is not payable should be a priority for the Government. As my hon. Friend said at that time, this measure will cost nearly £1 billion by 2020-21. That is a vast amount of money that could be better spent supporting those on middle and low incomes who are struggling to get by.
As with so many measures in the Bill, the Government are prioritising the wrong people, with tax giveaways for the wealthy, such as this measure, and cuts to capital gains tax, at a time when they were considering taking billions away from working people through cuts to tax credits and disability payments. Not only do we disagree with the principle of this tax giveaway; we are also concerned that the legislation is badly drafted. A similar outcome could be achieved through a simpler mechanism. The Chartered Institute of Taxation has said:
“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.”
Will the Minister clarify what will happen in that instance?
I will touch briefly on Government amendments 13 to 19, which according to the Minister’s helpful letter of
The Opposition do not feel that these measures, which expand the number of situations in which inheritance tax is not due, are a priority, given the apparent funding constraints we often hear about from the Government. We will therefore oppose clause 82 and schedule 15.
It is a pleasure to serve under your chairmanship yet again, Mr Howarth. I congratulate the hon. Lady on the clear case she has made. We shall also oppose this measure.
I have one question for the Minister. He mentioned that 26,000 would be taken out of the tax altogether and 18,000 would pay less because of this change. Will he clarify how many of those are in Scotland and the north of England, compared with some of the richer parts of the country? I think that would be informative. Secondly, this is the wrong initiative at the wrong time, and it is targeted at the wrong people. That is why we will oppose it.
I am disappointed that this clause and the approach that the Government are taking do not have cross-party support, but I am sure that my hon. Friends on the Government side will support the measures.
The first point I have to make in response to the criticism of the clause is that, of course, the Government were elected and one of our manifesto pledges was to take forward measures to take the family home out of inheritance tax. We also have to bear it in mind that not doing anything on inheritance tax is not a neutral option, because the consequence of leaving inheritance tax alone is that, in a period in which property prices increase, more and more households and estates fall within inheritance tax and inheritance tax receipts will go up. It is worth pointing out that inheritance tax receipts in cash terms will continue to be higher under this Government than at any time since the introduction of inheritance tax in 1986, including the period of the last Labour Government between 1997 and 2010, when receipts peaked at £3.8 billion in 2007-08. Let us remember that.
Regarding the impact of not doing anything, do remember that relatively modest properties have increased in value. In 2015, the average house price in London was £552,000 and in the south-east it was £375,000. That means that relatively modest households were potentially finding themselves with an inheritance tax bill, which had not previously been the case under Governments of different colours.
Some technical points were made by Opposition Members. I was asked whether the downsizing rules will apply when the former house was held in a trust. Amendment 19 caters for such situations. The measure will apply only where the former home was held in a type of trust that was set up for the benefit of a person during their lifetime and that person had a right to the trust assets. It does not apply to former homes held in discretionary trusts because they would not qualify for the residence nil-rate band in those circumstances.
I was asked whether the estate would qualify for the allowance if the home is left in trust for a spouse and on their death passes to the children. The answer to that is no. If the home is transferred on death to a life interest trust to the benefit of the surviving spouse, the deceased’s estate will not qualify for the residence nil-rate band because the home is not inherited by a direct descendant at that time. However, the unused portion of the residence nil-rate band can be transferred to the surviving spouse’s estate to be used on their death. If the home subsequently passes to a direct descendant on the death of the surviving spouse or life tenant, their estate will be eligible for the residence nil-rate band.
In terms of exact numbers for the United Kingdom, I do not have those numbers; I will have to write to the hon. Member for Kirkcaldy and Cowdenbeath. However, it is the case that there are beneficiaries of this policy throughout the United Kingdom.
We are not denying that there will be people who will benefit from not paying tax or from paying less tax, but in places in Scotland you can get a castle for £1 million—albeit a small castle—and that is in no way, shape or form a family home, and it should not be classed as such.
I come back to what I was saying earlier, namely, that doing nothing will mean that many properties, often relatively modest properties, will fall within the inheritance tax bands. Doing nothing will mean that a tax that I think most people in this country would support, on the basis that it is designed for the very wealthy, would apply to people who would not necessarily have had high incomes in their lifetimes. That creates a sense of unfairness. There are certainly parts of Edinburgh where relatively modest properties are of such a value as to create concerns about inheritance tax.
If the Minister is concerned about rising property prices and an overheating housing market driving more people into inheritance tax bands, perhaps he should do something about the housing market—rather than fiddling around with the tax bands—for example, by building more houses for rent and cooling the housing market in that way.
I very much support the idea that we need to build more homes. As a Government, we have done so. We are a Government who have changed many of the planning rules. We are a Government who announced a substantial housing package in the autumn statement. This Government are doing much to improve house building in this country. Indeed, the number of building starts last year was high, which is encouraging.
To conclude, the measures before us are a sensible further step to meeting our objective of taking the family home out of inheritance tax. They will also ensure that there is no impediment to people downsizing, creating difficulties in the housing market. I hope, notwithstanding the objections from the Opposition, that clause 82 and schedule 15 will stand part of the Bill.