Inheritance Tax threshold increased to £1 million
The changes within the 2015 Summer Budget were designed to “reward hard working people”. The basic premise is to provide an additional inheritance tax allowance in respect of a residential property.
The current nil rate band, being the amount that can be passed free of tax on death, is currently set at £325,000, which has been frozen since 2009. This is transferable between spouses and civil partners, meaning that potentially a tax free allowance of £650,000 can be passed to beneficiaries on death.
As house prices have increased in recent years it has resulted in more families being caught by inheritance tax. The changes in the recent budget will see an extension to the current tax free allowance by reference to a residential property. By 2021 those tax payers who pass a property to direct descendants (being a 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.
These changes are not without limitations. The new allowance will only apply to deaths on or after 6 April 2017 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.
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.