Tony Granger covers the new IHT rules relating to the family home and inheritance tax announced in the Emergency Budget.
Inheritance tax is not just for the rich; it may affect middle class families as well. Soaring house values, particularly in London and the South East, have pushed house values up, and with that the prospect of increasing IHT. Inheritance tax is paid at 40% of the taxable value of your estate after the nil rate band (NRB) of £325,000 has been deducted. The last to die in a married couple has the benefit of two nil rate bands at up to £650,000 if the first to die had not used their NRB fully, and the unused amount can pass to the survivor. However, on the death of the survivor, the family home would be sold or pass to the next generation or a third party and IHT may again become payable.
This issue had become a hot potato for the Government, who had made previous election promises to increase the nil rate band (it has been at £325,000 since 2009 and will endure at this level until 2021 now), but had not done so. The latest Budget announcements changed that position, by adding a further nil rate band amount for married couples (and civil partners) for passing on the family home to direct descendants at a later date.
However, one must consider whether the family will really be protected from IHT for the value of the family home.
New family home allowance
From 6 April 2017 the government will introduce a ‘family home allowance’ that will raise the Inheritance Tax threshold to £500,000 for an individual and £1 million for couples.
The new main residence or additional nil rate band does not come into effect until April 2017, so for nearly two years taxpayers will only have the existing frozen nil rate band of £325,000. The additional nil rate band will increase gradually: £100,000 in 2017/18; £125,000 in 2018/19; £150,000 in 2019/20; and £175,000 in 2020/21.
Where it will apply:
- A residential property left to one or more direct descendants on death.
- You can leave the property to children and grandchildren only.
- Applies to one residential property only. That property can be nominated after death.
- Unused portion of additional NRB of £175,000 can be transferred to the surviving spouse.
- If the property is sold or downsized the relief could continue (to be confirmed).
Downside:
- The relief is tapered and gradual and not immediate – 6.4.2017 is the earliest to benefit.
- Maximum benefit only in 2020-2021 tax year.
- Only direct descendants can benefit, otherwise the relief is lost.
- Childless couples receive no relief at all, losing a maximum of £140,000 in IHT.
- Large estates (not only the house value) worth over £2 million net lose the relief through taper on a £1 for £2 basis. At £2.35 million the additional relief is lost completely.
- People will stay in their homes and not move, to ensure larger inheritances.
- Possible implications if equity is released to pay for care costs (the house is effectively sold) if going in to care, where the reliefs could be lost.
Practical Tip:
Effectively, if you own your own home and wish to leave it to your children and grandchildren once both owners have died, by 2020 your estate could save an additional £140,000 in IHT. However, immediate savings are negligible. You may not wish to leave the family home to children or grandchildren, or may wish for a trust to be set up to protect a vulnerable beneficiary, or spouse, and in these cases, careful will planning is essential. If your overall taxable estate is worth over £2.35 million, then the additional relief is not available to you, even if your home is valued at £1 million. Consider other IHT planning using life assurance in trust or making bequests to charity, for example, to reduce IHT.
In certain instances the family home is not protected from IHT, as described above.
