Understanding the complicated new inheritance tax changes
The arrival of new, more generous inheritance tax-free allowances sound great to most of us - the trouble is, not only are the new rules downright complicated and confusing but they are not even in force yet either.
The former Chancellor, George Osborne, announced the changes in July 2015 to allow many middle-class families to leave more of their main residence to their direct descendants tax free.
Soaring property prices
The idea was to bring down the tax bill for millions of normal British families whose parents' or grandparents' estates have soared in value due to two decades of raging property inflation.
In 2009, when the initial nil-rate band was set, just one in ten homes was sold above the threshold. By 2015, one in four homes went for more than £325,000.
But the new rules don't actually come in until April 2017 leading to accusations that people with relatives who died between the previous budget announcement and next year, have lost out. Some campaigners even argue that 30,000 families should receive compensation.
Especially as the government raked in £4.7billion in inheritance tax in the year to April 2016 - up 22 per cent on the year before and the highest take ever.
So, what exactly is going on?
Currently, inheritance tax is imposed at 40 per cent on the estates of those who die, above the main threshold set at £325,000 for a single person. This doubles up to £650,000 for married couples and civil partners who pass on their wealth to their surviving spouse and have not used any of their allowance themselves.
But as house prices escalate, more and more families have found themselves over the tax-free threshold when they inherit.
From 6 April, 2017 an additional 'residence nil rate band' of £100,000 per person will be introduced - effectively taking the threshold at which inheritance tax becomes payable to £850,000 for family beneficiaries.
Crucially, it only applies to wealth connected to your main residence and can only be left to direct descendants, for example children or grandchildren.
- The threshold is due to increase again to £125,000 in the 2018/19 tax year, to £150,000 in 2019/20 and to £175,000 in 2020/21.
- From 2021/22 the threshold will increase in line with consumer prices inflation.
For help, advice and guidance on this complicated area of the law please contact Wards Solicitors' Wills, Probate and Mental Capacity team by phone or pop into one of our 11 local offices.