There was good news for some homeowners and families when Chancellor George Osborne delivered his 2015 summer budget, with the announcement that the inheritance tax threshold would be raised where someone leaves their home to their children on death.
An additional allowance of £100,000 per person has been created that takes effect from 6th April 2017. This new allowance will increase annually until 2020 when it reaches £175,000 for deaths after 6th April in that year. This means that potentially, in future, a married couple who own a home worth up to £1 million may leave it to their children in their will without any inheritance tax being paid on the gift.
Across the country, house prices have risen sharply over the last few years, especially in London. The new inheritance tax allowance will provide homeowners with some relief that there is a greater chance of the family home being retained within the family rather than it having to be sold to meet an inheritance tax liability on death.
The Current Inheritance Tax Threshold
Since 2009, the inheritance tax threshold has been £325,000 per person. However, the housing market has remained anything but static, and the rise in house prices over the past fifteen years has equated to many more individuals and couples owning homes valued above the inheritance tax threshold.
At the present time a couple who are married or in a civil partnership can have a transferable inheritance tax allowance which potentially provides for an allowance up to £650,000 on the death of the second to die. Inheritance tax is payable at 40% on the value of the net value of the estate over and above the £325,000 (or £650,000).
The Inheritance Tax Changes
From 6th April 2017, parents will be able to add a further £100,000 to their individual £325,000 threshold (known as the ‘family home allowance’). This will increase to £125,000 for the 2018/19 tax year, £150,000 for 2019/20 and £175,000 for 2020/21.
The individual must have resided in the property during their lifetime (therefore not a buy-to-let property) and only one property can be elected to benefit from the allowance. The property must also be left to a direct descendant such as a child (including a step-child, adopted child or foster child) of the deceased and their lineal descendantsIf individuals decide to downsize their home at any stage, the will be eligible for an “inheritance tax credit” so that even if they sell an expensive property they will still qualify for the new threshold.