£1 million Inheritance Tax Threshold?
In the Chancellor's budget of July 2015, significant changes to the Inheritance Tax (IHT) allowance were confirmed.
Since 2009 individuals have benefitted from a "Nil Rate Band" (NRB) of £325,000 per person.
The NRB can be transferred from one spouse to another. Therefore, married couples (and civil partners) can leave a total of £650,000 free of IHT.
The remainder is taxed at 40% (unless it is left to charity).
Announced in the budget was the "Family Home Allowance" (FHA) which can be added to the current NRB. As the names suggests, it will only apply to a specific property and will not act as a general extension of the NRB.
For the FHA to be available, the property must have been occupied by the deceased (therefore "buy to let" properties will not qualify), and it must be passed down to descendants (although the definition is fairly wide to include, for example, step children).
The "£1m Inheritance tax threshold" that was celebrated in the newspapers' headlines will not come into effect straight away. The FHA will be introduced in instalments as follows:
2017 - £100,000
2018 - £125,000
2019 - £150,000
2020 - £175,000
From 2021 the FHA will increase in line with the Consumer Prices Index (CPI).
Note that the FHA will be tapered down for estates worth more than £2m: reduced by £1 for every £2 over the £2m.
In our example a married couple/civil partners own a house worth £800,000 and their other assets total £300,000 (total estate of £1.1m). The house will be left to descendants.
In 2015, with no FHA, the calculation is as follows: NRB x 2 = £650,000. The remainder, £450,000 is taxed at 40%. Total IHT payable = £180,000.
In 2020, with a FHA of £175,000 per person, the calculation is as follows: NRB x 2 = £650,000. FHA x 2 = £350,000. The remainder, £100,000, taxed at 40%. Total IHT payable = £40,000.
The changes will assist the traditional family unit where the family home (the only significant asset) is being passed down to descendants.
The changes will though not benefit everyone. Families where the estate is made up of something more complicated than just the family home (perhaps a family business) may not receive the full benefit from the changes.
The changes will also not help people who are leaving their property to anyone other than their descendants. Although the term descendants is defined widely, with modern family dynamics changing this could be argued to be slightly outdated.
If you wish to discuss how the Inheritance Tax changes may affect your Will please contact Jenny Pierce, Head of Wills and Probate on 0117 9292811.