The new Conservative majority government means that many homeowners are…
For many readers, Inheritance Tax (known as IHT) is a major concern and here are some of the important points about the changes that came out of the recent Summer Budget.
Firstly, it’s important to understand that the main £325,000 nil rate band has not been changed but will remain frozen until 2020/21. The government will be introducing an additional, main residence nil-rate band which will be a maximum of £175,000 by 2020/21. Note that this new main residence nil-rate band is to be introduced gradually from 2017/18 starting at £100,000 and will increase by £25,000 each year until it reaches £175,000 in 2020/21. This will be available if the deceased’s interest in a residential property (which has been their residence) is included in the estate and left to one or more direct descendants on death (this is to say, children or grandchildren and this will include step-children, adopted or foster children).
The qualifying residential interest will be limited to one residential property but personal representatives will be able to nominate which residential property should qualify if there is more than one in the estate. Properties which have never been a residence of the deceased, for instance, buy-to-let properties won’t qualify.
For many people, a significant amount
of their wealth is tied up in the family home
A surviving spouse or civil partner can make a claim to transfer any unused proportion of the main residence nil rate band in the same way a unused nil-rate band can be transferred.
If the net value of the estate is above £2 million, then the additional nil-rate band will be tapered away by £1 for every £2 that the net value exceeds that amount. This will ensure that the very wealthy don’t benefit from this new allowance.
There will be further consultation which will published in September to put into place protections for those downsizing or ceasing to own a residence on or after 8th July.
For many people, a significant amount of their wealth is tied up in the family home and over the last few years, increasing numbers of estates have been dragged into the IHT net just because of soaring house prices and this has probably especially been the case for those living in London and the home counties. In fact, according to the Chancellor, if no action was taken on IHT then just rising house prices would double the amount of estates currently drawn into Inheritance Tax. So the main residence nil-rate band will see some realignment to property prices during this parliament and the Conservatives will have achieved their long-promised £1 million IHT threshold.
Planning against IHT is still important because these new regulations are probably less far-reaching than they appear. The nil-rate band of £325,000 has been frozen since 2009 and will remain frozen until the 2021 tax year, whilst property and other assets have soared in value over recent years. Some people will also simply not benefit from these new regulations and finally the new threshold for those who do qualify will not reach the £1 million level until the 2021 tax year.