Full Details of Summer 2015 Budget Inheritance Tax Changes

In the summer 2015 budget this week, George Osborne introduced some major changes to the rules on inheritance tax, so that properties were given an additional allowance that would take a lot of them out of the inheritance tax limits.

The current Inheritance Tax threshold is £325,000. This will remain but in addition there will be an allowance for family homes that are passed on to direct descendants (children and grandchildren). This new allowance will reach it’s maximum level of £175,000 in 2020/21 but will be tapered from 2017 onwards until it reaches that rate.

So a summary of the new allowance in tax years is as follows:

2017/18 – £100,000

2018/19 – £125,000

2019/20 – £150,000

2020/21 – £175,000

The nil rate band will then increase in line with the Consumer Price Index from 2021 onwards.

The allowance can be passed between couples so that when the first partner dies that allowance is passed on to the surviving spouse so that when they die the allowance is effectively doubled. Thus when the second partner dies the allowance could be worth up to £350,000. Add this to the standard Inheritance tax allowance (that can also be passed between spouses) and this would give a total value of £1m (remembering that £350,000 of this amount can only be held against property).

The existing £325,000 allowance can be used against any assets that the deceased holds, including property.

There has also been a clause introduced that means that if someone downsizes from their main residence, the value of their previous home can be taken into account. For example, an individual might choose to downsize from a home worth £250,000 to a home worth £150,000. They could still benefit from the maximum allowance of £175,000 in 2020-21 if they leave the home and £25,000 of other assets to direct descendants.

There will also be a tapered withdrawal of this new Inheritance Property Allowance for properties worth over £2m. The tapering will be at the rate of £1 for every £2 in value over £2m, for example:

Property worth £2,100,000 – IHT Property allowance is reduced by £50,000.

Therefore, property worth £2,350,000 (after 2020/21) will not have any property allowance attached to it.


40% Tax Band Increased for 2016/17

The chancellor George Osborne this week announced in his extra budget that the figure at which the 40% tax band kicks in will be increased from 2016 to £43,000 from the current level for 2015/16 of £42,385.

The 2015/16 figure of £42,385 is made up of the £10,600 personal allowance and the 20% tax band amount of £31,785.

Next year’s figure is made up of the new £11,000 personal allowance and a 20% tax band amount of £32,000.

Whilst the personal allowance had been increasing, the 20% tax band allowance had been decreasing in recent years so this is the first increase for a while which brings it back up to the level it was in 2013/14.

Personal Allowance 2016/17

In the first sole Conservative budget in 19 years, George Osborne has pledged to accelerate the increase in the personal allowance for 2016/17 from the previously announced figure of £10,800 to the new figure of £11,000.

The personal allowance 2016/17 is £11,000

The current personal allowance of £10,600 was due to increase to £10,800 in April 2016 but will now increase to £11,000 which was the proposed figure for 2017/18.

This all leads up to the plan for a personal allowance figure of £12,500 that the Conservatives plan to be in place by 2020. The government has continued to publicise it’s plan to increase the personal allowance so that those on lower wages do not have to pay any tax. However, of course, any increase in the personal allowance will also benefit those higher earners as they will have enough earnings to cover it. The only people who will not benefit in the increase in the personal allowance are those whose earnings are too high to be entitled to a personal allowance.

Each increase of £200 in the personal allowance should save people earning less than £100k pa, £40 a year in tax, or £3.33 a month, not a massive amount but every little helps if you are earning on the lower end of the scale.

£100k Tax Trap

There is a point when you get to earning £100,000 a year where the personal allowance becomes a bit more complicated as the allowance is withdrawn gradually on earnings over this level. Some people refer to this as the £100k tax trap.

Basically the personal allowance is reduced by £1 for every £2 of earnings over £100,000. This means that one your earnings reach twice as much as the personal allowance, plus £100,000, you will no longer be entitled to any personal allowance and all of your earnings will be taxable.

Therefore your personal allowance and tax bands would be as follows, depending on your earnings:

For 2015/16

Earnings Personal Allowance 20% Band 40% Band Total Tax
£100,000 £10,600 £10,600-£42,385 £42,386-£100,000 £29,403
£102,000 £9,600 £9,600-£41,385 £41,386-£102,000 £30,603
£104,000 £8,600 £8,600-£40,385 £40,386-£104,000 £31,803
£106,000 £7,600 £7,600-£39,385 £39,386-£106,000 £33,003
£108,000 £6,600 £6,600-£38,385 £38,386-£108,000 £34,203
£110,000 £5,600 £5,600-£37,385 £37,386-£110,000 £35,403
£112,000 £4,600 £4,600-£36,385 £36,386-£112,000 £36,603
£114,000 £3,600 £3,600-£35,385 £35,386-£114,000 £37,803
£116,000 £2,600 £2,600-£34,385 £34,386-£116,000 £39,003
£118,000 £1,600 £1,600-£33,385 £33,386-£118,000 £40,203
£120,000 £600 £600-£32,385 £32,386-£120,000 £41,403
£121,200 £0 £0-£31,785 £31,786-£121,200 £42,123

Please note that these figures are purely theoretical and may not apply to your own personal tax circumstances as there may be other factors affecting your personal allowances and taxable income. This is just intended as a basic guide to illustrate how the personal allowance decreases after your earnings exceed £100,000.

Please take financial advice if you are in any doubt about your own personal tax circumstances.