In the Summer Budget of July 2015 it was proposed that Inheritance tax (IHT) be scrapped on homes which parents or grandparents pass on to children, grandchildren or step children. The new rules will be phased in gradually between 2017 and 2020. However, they are complicated and the way the new legislation works in practice needs explaining.
Who pays IHT? You do if your assets are above the threshold!
As a starting point it is worth remembering who currently pays IHT. In the 2015/16 tax year, everyone is allowed to leave an estate valued at up to a £325,000 without their beneficiaries paying IHT. The amount is set by the Government and is called the nil-rate band threshold.
Above the nil-rate band, anything you leave behind is subject to tax of 40% (or 36% if you leave at least 10% of your assets to a charity).
So if you leave assets worth £500,000, your estate pays nothing on the first £325,000, and 40% on the remaining £175,000 – a total of £70,000 in IHT - if you're not leaving anything to charity or a spouse or civil partner.
The £325,000 limit has been frozen until at least 2020/21, although the “extra” main residence allowance will be brought in from 2017 onwards.
The new proposals are as follows:
The current allowance where no IHT is charged on the first £325,000 (per person) of someone's estate remains unchanged. Above the threshold, the charge is 40%.
A new tax-free 'main residence' band will be introduced from 2017, valid only on a main residence and where the recipient of a home is a direct descendant (classed as children, step-children and grandchildren). This will be phased in gradually, starting at £100,000 in April 2017, rising by £25,000 each year until it reaches £175,000 in 2020.
In 2017 the maximum that can be passed IHT free will be £850,000 for married couples and civil partners and £425,000 for others. For singles, this is made up of the existing £325,000, plus the “extra” £100,000 main residence band. For couples, when the first dies their allowance is passed to the survivor, so that £425,000 is doubled to £850,000.
In 2020, the tax-free amount will rise to £1m for couples and £500,000 for singles, made up of the existing £325,000 and the “extra” main residence allowance of £175,000.
On properties worth £2 million or more, homeowners lose £1 of the 'main residence' allowance for every £2 of value above £2m. So for a couple, with a property worth £2,350,000 or more there will no “extra” allowance.