Chancellor George Osbourne has announced in his 2015 budget that the Inheritance Tax (IHT) threshold is to effectively increase from £325,000 to £500,000 per person by 2020, taking an estimated 20,000 estates per year out of IHT. For a married couple or civil partners, assets worth up to £1m, including the family home, may be able to pass free of IHT.
The UK has seen property prices soar in recent years, and this has raised concerns for many about the amount of IHT that may be payable on their estate upon their death. It is thought that the new rules have been bought in to address this issue.
Inheritance Tax rules: now
At present, IHT is payable at a rate of 40 per cent on the value of an estate over £325,000 (the current ‘nil rate band’). This can be doubled to £650,000 for a married couple or civil partners, where the first deceased spouse’s or civil partner’s nil rate band has not been used up in full.
IHT is not payable on transfers between married couples or civil partners.
Inheritance Tax rules: future
From 6 April 2017, the government has pledged to add a ‘main residence allowance’ of £100,000 per person to the existing £325,000 nil rate band. The main residence allowance will gradually increase until it reaches £175,000 per person in 2020. This will effectively top-up the nil rate band to £500,000, however it should be noted that the main residence allowance will only apply to the main family home.
Spouses and civil partners will continue to be able to utilise their partner’s nil rate band where it has not already been used up, meaning the new allowance for a married couple or civil partners could be up to £1 million.
The government also plans to introduce an ‘Inheritance Tax Credit’, whereby anyone who downsizes their home within a certain period before their death will still qualify for the new threshold, so long as the majority of the estate is left to their direct descendants.
If you would like advice in relation to Inheritance Tax and how these changes may affect, you please contact the Private Client team.