Facebooktwittergoogle_pluslinkedinmailFacebooktwittergoogle_pluslinkedinmail 

Heir today, gone tomorrow

We examine the impact of the latest changes in inheritance tax legislation on home owners.

For many people, their most valuable asset is the family home. If you live in London or the South East, where property values are highest, the likelihood your property is worth more than £650,000 increases, meaning inheritance tax could be due on your estate after your death.

The probate cannot be granted until the tax due is paid, which means families can be forced to sell properties in order to meet the tax bill if other assets are not sufficient to cover the cost.

A new £1m IHT allowance has been introduced for couples who want to pass on property wealth. Under current rules, everyone has a nil-rate band of £325,000 which is free from inheritance tax. Money left to your loved ones above this value is taxed at 40 per cent. Married couples and civil partners can share their nil-rate band to give them a total of £650,000 which can be passed on free of inheritance tax.

The nil-rate band has been frozen since 2009 and this static rate combined with rising property values has increased the number of estates which are subject to IHT. The new exemption for property worth up to £1million is designed to prevent the number of families incurring the tax from doubling over the next five years.

The Finance Bill will create a new additional ‘main residence nil-rate band’; this will apply from April 2017 at £100,000 rising to £175,000 by 2020/21.

  • £100,000 in 2017/18
  • £125,000 in 2018/19
  • £150,000 in 2019/20
  • £175,000 in 2020/21

This new allowance can be transferred between spouses in the same way as the standard nil rate band. This means that by April 2020 a couple could leave a property worth £1m free of inheritance tax. The measure is targeted at preserving wealth within families and therefore only applies where the assets are left to a child or grandchild.

If you have a second home or more than one main residence, your personal representatives can nominate which property the exemption applies to. The only stipulation is that the property was your residence at some point – a buy-to-let property would not qualify. If the value of your property is lower than the allowance available, it is not possible to use it to offset the value of other assets.

A number of people find they want to downsize to a more manageable property in later years, or may even need to sell their home to pay for care fees. A provision will be available to ensure these people also benefit from the additional nil-rate band if they downsize or cease to own a home on or after 8 July 2015. The government intends to consult on this and publish a proposal on the mechanics in September this year.

Relief is withdrawn for estates with a total value of more than £2m. The rate of withdrawal is £1 for every £2 over £2m. This means couples with an estate of more than £2.7m or a single person with £2.35m would not benefit.

The standard nil-rate band remains frozen at £325,000 until 2020/21. It is intended that both allowances will increase in line with the consumer price index from then.

So what should you do?

  • Review your will to make sure your descendants will be able to take advantage of this new rule; in particular you should revisit any trust arrangements in relating to your main residence as the exemption only applies to direct descendants.
  • Review any life cover that has already been put in place to help cover IHT.
  • Take the opportunity to assess the tax efficiency of your other assets and investments.

This article was first published in FT Adviser on 30 July 2015.

I have a question...

We're here to help. Quickly get to the answer you need by speaking to an EQ financial adviser now: Call 020 7488 7171 Mon-Fri, 8:30am-5:30pm
  • Search the EQ library

  • Find articles by theme

Some Free EQ Guides

10 Tips for Investing a Windfall
post

Coming into money isn’t something that happens often. Before you commit yourself to spending, investing, giving gifts or even giving up your job, here are some tips on how to make your windfall work for you in the long run.

Financial Planning Services
post

EQ is a Chartered Financial Planning firm able to offer a wide range of services to private clients including tax optimisation, retirement income planning and estate planning.

Final Salary Pension Transfers
post

The April 2015 Budget saw the most radical changes to the pensions landscape for a generation, but the new flexibility on offer is only available to personal pension holders. Members of final salary schemes can only access the new rules by transferring to a personal pension.

Saving Inheritance Tax
post

This guide explains how planning ahead of time can provide for – and in most cases reduce – the amount of tax that is ultimately due on your estate.

Spring Clean Your Finances
post

When it comes to money, it is fairly easy to get so entangled in the jargon that you lose sight of basic sound financial planning principles. This guide provides some pointers on important steps to take, and a few pitfalls to avoid, along the road to a healthy financial future.