Inheritance tax and the family home – what it means for you
Following George Osborne’s budget on 8 July, dramatic changes have been announced to the inheritance tax treatment of the family home. These changes implement a manifesto pledge made by the Conservative party prior to the last election.
The first point to note is that the current inheritance tax threshold of £325,000 will be frozen until April 2021, meaning that it will have remained unchanged for 12 years. The Conservatives have however introduced the concept of an additional inheritance tax nil-rate band (“NRB”) which can be claimed when a family home is passed on death to a “direct descendant” – namely a child, step-child, adopted or foster child and/or their own offspring. This additional NRB will be phased in over four years, with £100,000 available from April 2017, increasing to £175,000 by April 2020. Thereafter it will increase in line with the Consumer Price Index.
Many clients have been concerned that the sale of their property or a move to a smaller home would result in the loss of this additional benefit. This does not appear to be the case, although exactly how the Government will ensure that people in this situation continue to benefit from the new rules will only be known in September, following the publication of a consultation on this subject. All we know now is that is that the allowance will still be available if a person downsizes or ceases to own a home on or after 8 July 2015 provided assets of an equivalent value are passed on death to direct descendants.
This allowance will not be available immediately. It only applies to deaths on or after 6 April 2017, and will only be fully implemented by 6 April 2020. The Government will therefore have fulfilled the election pledge to bring in this additional benefit during the lifetime of this Parliament, but clearly at the lowest realistic cost to the Exchequer.
There is another sting in the tail for those whose assets are worth over £2,000,000. This additional NRB reduces at a rate of £1 for each £2 above the £2m threshold. Those with more than £2,350,000 will enjoy none of this additional benefit, but will instead be limited to the existing NRB of £325,000.
This budget is very much a political one. The Chancellor could have simplified inheritance tax matters by simply increasing the NRB for each individual to, say, £500,000, but instead he has introduced a complicated arrangement with additional allowances being brought in over a four-year period. Childless couples, siblings who share a house and others who live together may have cause to complain.
It is therefore crucial to get good quality advice on the impact of these changes on your inheritance tax liability, particularly if you have a second home or are already widowed. Although the details of these changes are not yet finalized, your legal advisor will nevertheless be able to help you plan for the future with greater confidence.
Contact: Elliot Lewis