Inheritance tax set for reform - Palmers Solicitors

Inheritance tax set for reform

Major reform of inheritance tax (IHT) is on the cards following the Conservatives’ victory in the 7 May general election.

The party’s manifesto included a pledge that if it formed the next government, it would take the family home out of IHT by introducing a new, transferable, family home allowance of £175,000 per person, on top of the existing IHT nil rate band per individual of £325,000. Estates valued at above the £325,000 threshold – unchanged since April 2009 – are liable to IHT at 40 per cent.

The Conservatives said that for married couples and civil partners, this would effectively increase the inheritance tax threshold to £1 million. The allowance would gradually be withdrawn from estates worth over £2 million, with those valued at more than £2.35 million losing all of the new allowance

In 2013-14, around five per cent of estates were estimated to have an IHT liability but last year the independent Office of Budget Responsibility suggested that this would rise to 9.9 per cent by 2018-19, chiefly due to rising house prices. In 2014-15, the government collected £3.7 billion in inheritance tax, just below its 2007-08 peak of £3.8 billion.

Lee McClellan, a partner at Palmers specialising in issues including inheritance tax planning and planning for long-term care, said: “Many people will welcome this move to protect the family home from inheritance tax, as an additional IHT planning tool alongside existing options, including lifetime gifts, IHT-efficient investments or placing lump sums payable on death into trusts.

“However, some of the finer detail has yet to be announced and there have been suggestions in the press that the allowance may only be available where the property is left to ‘direct descendants’. In any event, this is likely to lead to a more complex set of rules than would result from a simple increase in the IHT threshold.

“At the same time as considering IHT mitigation, homeowners may also wish to look at making plans for funding future long-term care needs. Someone whose property may have significantly increased in value, pushing them into the IHT bracket, may not be otherwise rich in assets and while their home may be safe from inheritance tax, they may still face losing it to pay care costs.

For more information on how we can help with IHT and care fee planning, please contact us.”