Section 8M — Inheritance Tax Act 1984: Residence nil-rate amount: cases involving conditional exemption

Residence nil-rate amount: cases involving conditional exemption 8M 1 This section applies where—

a a person (“D”) dies on or after 6 April 2017, b ignoring the application of this section, D's residence nil-rate amount is greater than nil, and c some or all of the transfer of value under section 4 on D's death is a conditionally exempt transfer of property consisting of, or including, any of the following—

i some or all of a qualifying residential interest;

ii some or all of a residential property interest, at least some portion of which is closely inherited, and which is not, and is not included in, a qualifying residential interest; iii one or more closely inherited assets that are not residential property interests.

2 Subsections (2B) to (2E) apply for the purposes of sections 8E to 8FD if—

a ignoring the application of this section, D's residence nil-rate amount is given by section 8E, and b some or all of the transfer of value under section 4 is a conditionally exempt transfer of property mentioned in subsection (1)(c)(i). 2A In subsections (2B) to (2E), but subject to subsection (3)(a), “the exempt percentage of the QRI” is given by— X QRI × 100 where— X is the attributable portion of the value transferred by the conditionally exempt transfer, QRI is the attributable portion of the value transferred by the transfer of value under section 4, and “ the attributable portion ” means the portion (which may be the whole) attributable to the qualifying residential interest. 2B If—

a the exempt percentage of the QRI is 100%, and b D has no entitlement to a downsizing addition, D's residence nil-rate amount and amount available for carry-forward are given by section 8F(2) and (3) (instead of section 8E). 2C If—

a the exempt percentage of the QRI is 100%, and b D has an entitlement to a downsizing addition, D's residence nil-rate amount and amount available for carry-forward are given by section 8FD(3) to (6) (instead of section 8E as modified by section 8FC(2)). See also subsection (2G). 2D If—

a the exempt percentage of the QRI is less than 100%, and b D has no entitlement to a downsizing addition, D's residence nil-rate amount and amount available for carry-forward are given by section 8E but as if, in subsections (2) to (5) of that section, each reference to NV/100 were a reference to NV/100 multiplied by the percentage that is the difference between 100% and the exempt percentage of the QRI. 2E If—

a the exempt percentage of the QRI is less than 100%, and b D has an entitlement to a downsizing addition, D's residence nil-rate amount and amount available for carry-forward are given by section 8E as modified by section 8FC(2), but as if the reference to NV/100 in section 8FC(2)(a) were a reference to NV/100 multiplied by the percentage that is the difference between 100% and the exempt percentage of the QRI. See also subsection (2G). 2F Subsection (2G) applies for the purposes of sections 8FA to 8FD if—

a some or all of the transfer of value under section 4 is a conditionally exempt transfer of property mentioned in subsection (1)(c)(ii) or (iii) (or both),

b D has an entitlement to a downsizing addition, and c DA exceeds Y (see subsection (2H)). 2G Subject to subsection (3)(aa) and (ab), the amount of the downsizing addition is treated as reduced by whichever is the smaller of—

a the difference between DA and Y, and b Z. 2H In subsections (2F) and (2G)— DA is the amount of the downsizing addition to which D has an entitlement (ignoring the application of subsection (2G)); Y is so much (if any) of the value transferred by the transfer of value under section 4 as—

is not transferred by a conditionally exempt transfer, and is attributable to— the closely inherited portion (which may be the whole) of any residential property interests that are not, and are not included in, a qualifying residential interest, or closely inherited assets that are not residential property interests; Z is the total of— the closely inherited conditionally exempt values of all residential property interests mentioned in subsection (1)(c)(ii),

and so much of the value transferred by the conditionally exempt transfer as is attributable to property mentioned in subsection (1)(c)(iii). 2I For the purposes of the definition of “Z”, “the closely inherited conditionally exempt value” of a residential property interest means—

a so much of the value transferred by the conditionally exempt transfer as is attributable to the interest, multiplied by b the percentage of the interest which is closely inherited.

3 For the purposes of calculating tax chargeable under section 32 or 32A by reference to a chargeable event related to property forming the subject-matter of the conditionally exempt transfer where D is the relevant person for the purposes of section 33—

a where subsections (2B) to (2E) apply and the chargeable event relates to property mentioned in subsection (1)(c)(i), in calculating the exempt percentage of the QRI, X is calculated as if the attributable portion of the value transferred by the conditionally exempt transfer had not included the portion (which may be the whole) of the qualifying residential interest on which the tax is chargeable, aa where subsection (2G) applies and the chargeable event relates to property mentioned in subsection (1)(c)(ii), Z is calculated as if it had not included the portion (which may be the whole) of the closely inherited conditionally exempt value of the residential property interest on which the tax is chargeable, ab where subsection (2G) applies and the chargeable event relates to an asset mentioned in subsection (1)(c)(iii) (“the taxable asset”), Z is calculated as if it had not included so much of the value transferred by the conditionally exempt transfer as is attributable to the taxable asset, b in the cases mentioned in paragraphs (a), (aa) and (ab), section 33 has effect as if for subsection (1)(b)(ii) there were substituted—

ii if the relevant person is dead, the rate or rates that would have applied to that amount in accordance with section 8D(2) and (3) above and the appropriate provision of section 7 above if—

a that amount had been added to the value transferred on the relevant person's death, and b the unrelieved portion of that amount had formed the highest part of that value. , ... c for the purposes of that substituted section 33(1)(b)(ii) “the unrelieved portion” of the amount on which tax is chargeable is that amount itself reduced (but not below nil) by the amount (if any) by which—

i D's residence nil-rate amount for the purposes of the particular calculation under section 33, exceeds ii D's residence nil-rate amount for the purposes of the charge to tax under section 4 on D's death , and d where the chargeable event relates to property mentioned in subsection (1)(c)(i) and subsections (2B) to (2E) do not apply, section 33 has effect as if in subsection (1)(b)(ii) after “in accordance with” there were inserted “ section 8D(2) and (3) above and ” .

4 The following provisions of this section apply if immediately before D's death there is a person (“P”) who is D's spouse or civil partner.

5 For the purposes of calculating tax chargeable under section 32 or 32A by reference to a chargeable event related to property which forms the subject-matter of the conditionally exempt transfer where the chargeable event occurs after P's death, the amount that would otherwise be D's residence nil-rate amount for those purposes is reduced by the amount (if any) by which P's residence nil-rate amount, or the residence nil-rate amount of any person who dies after P but before the chargeable event occurs, was increased by reason of an amount being available for carry-forward from D's death.

6 Where tax is chargeable under section 32 or 32A by reference to a chargeable event related to property which forms the subject-matter of the conditionally exempt transfer and the chargeable event occurs before P's death, section 8G(3) has effect for the purpose of calculating P's brought-forward allowance as if—

a before the “and” at the end of paragraph (c) there were inserted—

ca reduce that total (but not below nil) by deducting from it the recapture percentage, , b in paragraph (d), before “total”, in both places, there were inserted “reduced”, and c the reference to the recapture percentage were to the percentage given by— T A R E E × 100 where— REE is the residential enhancement at the time of the chargeable event, and TA is the amount on which tax is chargeable under section 32 or 32A.

7 If subsection (6) has applied by reason of a previous event or events related to property which forms the subject-matter of the conditionally exempt transfer , the reference in subsection (6)(c) to the fraction— T A R E E