Chancellor George Osborne has confirmed a widely trailed measure to reduce or eliminate the inheritance tax (IHT) paid on many family homes .
In his 8 July Budget, Mr Osborne said that IHT – levied at 40 per cent on estates worth more than £325,000 – was originally designed to be paid only by the very rich.
He said: “Yet today there are more families pulled into the inheritance tax net than ever before – and the number is set to double over the next five years. It’s not fair and we will act.”
However, despite the headlines, the complex changes proposed do not increase the IHT threshold to £1 million. Instead, a new allowance will be phased in from 2017, which can be offset against a person’s home when it is left to children or grandchildren. This allowance will be set at £100,000 in 2017-18 and will increase year on year to £175,000 by 2020-21. It will be in addition to the existing £325,000 threshold, which the Chancellor announced will not increase before the end of 2020-21.
Additional complications arise from the rules enabling the allowances to be transferred to a spouse or civil partner, the definition of who falls within ‘children or grandchildren’ and proposed rules governing what happens where a property has been sold prior to death
Whilst the government has said that the effect of the new allowance – called the main residence nil rate band – will be to create an effective IHT threshold of £1 million by 2020-21, the figure of £1 million will only apply to married couples and civil partners who own or, in certain circumstances have owned, a home worth more than £350,000 and even then only when they are leaving it to specified beneficiaries. The main residence nil rate band will also be withdrawn on a tapered basis for estates with a net value of more than £2 million.
The government said that the move would reduce the number of estates forecast to have a tax liability in 2020-21 to 37,000, around the same levels as in 2014-15, rather than an estimated 63,000 if the measure were not introduced.
Lee McClellan, a partner at Palmers specialising in issues including inheritance tax planning and planning for long-term care, said: “While the move to protect family homes from inheritance tax will be welcomed by many people, the rules appear unnecessarily complex and many people – including those with no ‘direct descendants’ – will take no or limited benefit from the changes. .
“The changes could mean that a married couple with no children pay more IHT than their friends with a more valuable estate who leave it to their children or grandchildren.
“Careful IHT planning will continue to be essential for anyone with a substantial estate – which could simply have been created by rising property values – as well as looking at steps to protect a family home from the impact of future care costs.
“Anyone with an estate worth more than £325,000 would be well advised to review their wills ahead of the introduction of the new rules, to ensure that they are structured in the most effective manner.”
For more information on how Palmers’ Wills, Trusts and Probate team can help, please contact us.