As revealed in the summer budget 2015, the chancellor has increased the inheritance threshold (IHT) bringing substantial inheritance tax savings particularly for those people at the top end of the property market.
The inheritance tax threshold is set to increase from £650,000 to £1 million for couples passing on the family home to their children or direct descendants by 2021. The government defines direct descendant as a child (including a step-child, adopted child or foster child) of the deceased and their lineal descendants.
The inheritance tax changes are complicated and can raise more questions than answers. We attempt to breakdown the main points for you here but nothing substitutes a thorough discussion with an expert in this field.
How it worked before the summer budget 2015…
As an individual, you were entitled to pass on £325,000 tax free to a surviving spouse or siblings. Married couples and civil partners were entitled to pass on their assets valued up to £650,000 free of tax. Any assets above this was taxed at 40%.
And after the budget changes…
The government had added a main residence allowance, which will also be transferrable to the surviving spouse and will be phased in as follows; starting at £100,000 for 2017/18, increasing to £125,000 in 2018/19, £150,000 in 2019/20, and £175,000 in 2020/21.
By 2021, that equates to an additional £175,000 to the existing £325,000, taking the nil band allowance to £500,000 per individual or £1 million per married couple or civil partners to leave to their family.
Assets over £2 million
If a couple’s assets including the family home exceeds £2million, the main residence allowance is subject to a taper, with £1 of the allowance being lost for every £2 of estate value over £2,000,000. This is after deducting any liabilities but before any reliefs. From April 2020, when the allowance is fully established, it will not be available if a joint estate exceeds £2.7 million.
For those that downsize or go into care
The additional allowance is also available if you choose to downsize or cease to own a home on or after 8 July 2015, and assets up to the value of the nil rate band are passed to direct descendants on death. The government will be publishing further technical details on downsizing in September 2015.
An estate without direct descendants
The government has defined direct descendants as children including a step-child, adopted child or foster child of the deceased and their lineal descendants. If you do not have children defined as such, i.e. you were considering leaving your estate to your brother, sister or nieces, you will not be eligible for the allowance.
An estate without a main residence
You are unable to claim for this allowance if you do not have a residence. The maximum nil rate band for an individual that you would be entitled to claim would be £325,000 and as a couple, £650,000.
Who can I talk to regarding my own circumstances?
We have many years’ experience of working on inheritance tax planning and our advice has saved our clients not only money but peace of mind over the years. If you have any concerns over these changes, please call our office on 01253 899989, we’d be happy to discuss how this affects you and your family’s inheritance tax position personally.
