Inheritance Tax threshold increased to £1 million
From April you will be entitled to an additional inheritance tax allowance in respect of a residential property. Great news for some, but there are also pitfalls to be aware of. Ellie Holland, Head of Private Client at The Wilkes Partnership Solihull explains.
The current ‘nil rate band’ (the amount that can be passed free of tax on death), is set at £325,000, which has been frozen since 2009. This is transferrable between spouses and civil partners, meaning that potentially a tax free allowance of £650,000 can be passed by a married couple to beneficiaries on death.
House price increases in recent years have resulted in more families being caught by inheritance tax. These changes will see an extension to the current tax free allowance by reference to a residential property.
By 2021 tax payers who pass a property to direct descendants (spouse, civil partner, children or grandchildren) on death will receive an additional allowance of £175,000, which is also transferable between spouses and civil partners.
This additional transferable allowance of £350,000 raises the potential tax free allowance on death to £1 million for a couple.
These changes are not without limitations:
- The new allowance will only apply to deaths on or after 6 April 2017 – with some exceptions if one spouse dies before this date – and will start at a rate of £100,000 for the tax year 2017/18, rising to £175,000 in 2021.
- This allowance will be capped at the value of the property in the estate and only applied if the property is correctly inherited by an appropriate beneficiary.
- Whilst this allowance can be maximised by married couples with offspring, taxpayers without descendants will miss out as they will not be able to satisfy the requirement of passing their property to direct descendants.
- There will also be an upper limit applied to the overall net value of the estate of £2 million, above which the residential allowance element starts to be reduced at a rate of £1 for every £2 above the threshold.
In order to benefit from these changes you must review your wills to ensure your estate is eligible and your wills are prepared to allow for the use of this enhanced allowance.
For more information, or to discuss how to ensure that the residential allowance is applied to your estate, please contact Ellie Holland on 0121 733 8000 or via email on firstname.lastname@example.org