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.