In their 2015 budget, the Government announced that it would be introducing a new inheritance tax break in respect of the family home. This is a welcome change in circumstances where the inheritance tax threshold has been frozen at £325,000 since 2009, which has led to more and more families becoming liable for inheritance tax; but does it go far enough?
What is the law currently?
IHT is currently payable on the value of assets an individual owns in excess of £325,000 at a rate of 40%. In the case of married couples and civil partners, depending upon how their Wills are drafted, it is possible for them to pass on their allowance on the death of the second of them. This means that they can pass on assets to their beneficiaries worth up to £650,000 before IHT becomes payable.
How will this change?
Under the new proposals, in addition to an individual’s IHT allowance of £325,000 there will also be a “family home allowance” of up to £175,000. This is being phased in gradually so that the allowance will start at £100,000 from 6th April 2017, eventually rising to £175,000 in April 2020. The existing nil-rate band will remain at £325,000 until the end of 2020/2021. There has been criticism about this as it means that non-property owning individuals will obviously not be able to benefit.
It should further be noted that this new allowance will only be available when the deceased has left their property to ‘direct descendants’. Direct descendants are classed as children, grandchildren, step-children, adopted and foster children, a spouse or civil partner of a direct descendant, or a surviving spouse or civil partner if they have not remarried or formed another civil partnership. It will not cover co-habitees, or those without children who want to leave their Estate to other relatives. It is arguable that this limit to the legislation is somewhat archaic and favours the more traditional family unit, and therefore does not go far enough.
There will be a tapered withdrawal of the additional nil-rate band for estates with a net value of more than £2 million. This will be at a withdrawal rate of £1 for every £2 over this threshold.
If you would like to discuss this in more detail, and how this might affect you, please contact Peter Marsh or Georgina Roberts in the Heswall office on 0151 342 1831, or Jane Hogg or Gwen Collins in the Liverpool office on 0151 236 7171.