You may have read George Osbourne’s recent Budget announcement that will enable family homes worth up to £1m to be passed on Inheritance Tax free. Although it was a fairly short statement in the Budget, as usual, the devil is in the detail and in order to introduce this new allowance, 9 pages of new law, full of new definitions and formulae, have been drafted. In addition some aspects are still subject to a technical consultation. So much for tax simplification!
Clearly this is good news for many home owners, but there are specific conditions that must be met before the new allowance can apply, so it cannot be assumed that it will apply to your circumstances.
Firstly, it will only apply to deaths from 6 April 2017 when the allowance will be £100,000, but it will gradually increase to £175,000 per person on 6 April 2020. It will also be in addition to the current nil rate band allowance of £325,000 per person. Although there will be complicated rules to transfer any unused allowance to a surviving spouse /civil partner, it will be a while before a couple can truly pass on a £1m home free of Inheritance Tax, but at least we are heading in the right direction.
Secondly, it must be lineal descendants who inherit the property (or a share in it) on death, although certain Will trusts for their benefit will also qualify. This does limit the way that the family home can be passed on whilst qualifying for the allowance and may mean the structure of some current wills will prevent the allowance from being available.
Thirdly, the allowance will be gradually withdrawn for net estates (i.e. what the value is after deducting any expenses) exceeding £2 million. It is worth noting that the allowance and estate limit are set to increase by the Consumer Price Index from 2021.
Whilst this new allowance is to be welcomed, as it could save tax of up to £140,000, things are therefore not as simple as they could be. For example, there are various reasons why it may not be appropriate for your children to directly inherit your home, such as their age, marital status and how financially responsible they are. Going forward, this may mean that the structure of Wills returns to the complexities of the days prior to the introduction of the transferable nil rate band!
However, making a Will is imperative to ensure your estate is being passed to the people you wish to benefit and although the new allowances will not apply for another couple of years, I still recommend reviewing Wills in the interim, in case your family circumstances have changed. There may also be other Inheritance Tax strategies to be considered.
If you would like more advice regarding the new Residence Inheritance Tax allowance or advice regarding your circumstances, please contact Rachael Dronfield.
