Inheritance Tax Update
On Wednesday 7th July, the Chancellor announced changes to the Inheritance Tax (IHT) rules. These purport to reduce the IHT burden for individuals by making it easier to pass on the family home to direct descendants by introducing a family home allowance in addition to the existing Nil Rate Band (NRB).
In short the changes mean that each individual will be allowed an “main residence allowance” in addition to their current NRB of £325,000 when they are leaving their interest in their main residence to their direct descendants.
The changes will be phased in over several years beginning in April 2017 and the full main residence allowance of £175,000 will be available from April 2020. Thereafter the threshold will increase in line with the Consumer Prices Index.
Currently each individual’s estate above the threshold of £325,000 is charged to IHT at 40%. Where a husband or wife (or civil partner) leaves assets to their spouse (or civil partner) on death this is exempt and the unused proportion of the NRB can be claimed by the surviving spouse or civil partner’s estate on their death. The new main residence allowance will be transferrable between spouses (and civil partners) in the same way.
Effect of these changes?
The effect of these changes for parents who ultimately wish to pass their home to their children could be (depending on the value of their home) that they may have an Inheritance Tax exemption of £1million between them (based on each having a NRB of £325,000 and an additional main residence NRB of £175,000). The Chancellor has frozen the existing NRB at £325,000 until April 2021.
The proposals stipulate that in order to claim the main residence allowance the deceased must have left their interest in the property to direct descendants who are defined as children, step children, adopted children, foster children and their linear descendants.
In addition the changes allow for individuals who may downsize or sell their property to still claim the main residence threshold based on the value of their previous family home.
The amount of the main residence allowance available will be limited to the value of the deceased person’s interest in the property or the limit of the threshold (which is being phased in from 2017) whichever is the lower.
Finally there will be a gradual withdrawal of the additional main residence allowance for estates above £2million and it will not be available at all for estates above £2.35million.
The budget changes reaffirm the importance of having a professionally drafted Will which should be reviewed regularly in light of new taxation rules.
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If you would like to make a Will, please get in touch with our Private Client Department.Contact Private Client Team