Inheritance Tax what’s changing?
Everyone is currently entitled to pass on £325,000 of wealth tax free (allowance is transferable for married couples to the survivor), regardless of whether or not they own a residence. Commonly known as the tax-free threshold, or “nil-rate band”. Any assets in an estate above this amount incur an IHT charge of 40%.
However, from April 2017 the Government is introducing a new, additional tax-free allowance for people who own a home. This is going to be called the “family home allowance”. It will eventually be worth an additional £175,000 per person. Added to the existing allowance of £325,000 that everyone gets, resulting in a new allowance for property owners of £500,000 – or £1m for couples.
This additional IHT perk will also be transferable between married couples and civil partners, even if one partner dies before its introduction in 2017.
Family Home Allowance
The Family Home Allowance will be introduced gradually over four years, with the allowance worth £100,000 in 2017-18, £125,000 in 2018-19, £150,000 in 2019-20 and £175,000 in 2020-21. Estates that are worth more than £2m will lose some or all of the family home allowance, which will be tapered at a rate of £1 for every £2 over the £2m threshold, resulting in more Inheritance Tax to pay.
The family home allowance and the taper threshold will increase in line with inflation as measured by the consumer prices index (CPI) from 2021-22. The existing £325,000 nil-rate IHT band will remain frozen until at least the end of 2020-21.
To qualify for the family home allowance, the property must have been the main home at some point and must be left to one or more direct descendants. This includes children, stepchildren, adopted children and foster children, and grandchildren, but not other relatives such as a nieces and nephews. If there is more than one property in the estate, only one will qualify for the family home allowance.
If a home is sold or downsized on or after July 8 2015, the family home allowance will still be available as long as assets of an equivalent value are passed to direct descendants.
In a valuable quirk, if one partner dies before April 2017 the survivor will be able to use both of their family home allowances when he or she dies to help offset Inheritance Tax. This is regardless of other factors such as whether the first spouse owned a share in the property or had already passed a share to children.
Please note this article is intended for information purposes only and should not be taken as advice. Always seek professional help with your Inheritance tax (IHT) planning needs