Will you benefit from the “main residence IHT allowance”?
In his July 2015 budget The Chancellor, George Osborne, announced changes to the threshold at which inheritance tax will become due; effectively raising the inheritance tax (IHT) threshold to £1m from £650,000 for married couples who leave their home to their children or grandchildren.
Although the new rules will not be fully effective, until April 2020, it is worth reviewing the proposals in more detail.
Currently IHT tax is payable on everything you leave in your estate above the tax-free limit, known as the nil rate band. In other words your beneficiaries have to pay tax at 40%, on anything they inherit above this amount, which has been frozen at £325,000 per person since 2009.
It does not apply to transfers between married couples and civil partners, so a widow can inherit her husband’s entire estate tax-free for example. Married couples and civil partners are entitled to double the allowance, passing on assets to their children or other relations worth up to £650,000 before a tax charge is triggered.
George Osborne announced that the Government will add a “main residence allowance”, eventually worth £175,000 per person, to the existing £325,000 tax free allowance from April 6, 2017. So for a married couple, or civil partners, where the total value of their home exceeds £1m and is left to direct descendants this could potentially save IHT of up to £140,000.
This will be gradually phased in, with the allowance initially worth £100,000 in 2017-18, £125,000 in 2018-19, £150,000 in 2019-20, and finally £175,000 in 2020-21. This will allow individuals to pass on assets worth up to £500,000, including a family home, without paying any IHT at all. For married couples and civil partners, the total is £1m.
Whilst the detail is still awaited, the increased allowance will still apply to anyone who wants to downsize to a smaller property, so even if they sell an expensive property they will still qualify for the new threshold providing the bulk of the estate is left to direct descendants.
This is an attempt to encourage pensioners to free up larger properties for growing families.
Although the Chancellor’s announcement will eventually remove an estimated 20,000 estates from IHT each year, the new main residence allowance is progressively withdrawn once a couple’s estate (including the family home) tops £2m. The withdrawal rate is £1 for every £2 over the £2m limit.
Where a joint estate is worth £2.7m there will be no extra allowance, so the status quo will prevail and IHT will be due on everything over £650,000.