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 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.

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. 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.


Marriage Allowance – A Misnomer?

So there has been a lot of talk about the new marriage allowance – which is what the government are calling it – but should it really be called that? In the past allowances have most often been amounts of money that you can use to offset against your earnings to enable you to pay more tax.

There was a marriage allowance in the past which was called the ‘married couple’s allowance’ which was given to anyone who was married basically. Nowadays this old allowance is only valid for those people born before 1935 so the numbers are ever dwindling as to who is receiving it. This was a much more generous allowance too and did not depend on income.

The new ‘marriage allowance’ to my mind is a bit of a misnomer – it is not really an extra allowance but instead a transfer of one person’s existing allowance that they are not using, to the other partner in the relationship. In addition to that, you can only transfer it if your partner is not earning in the 40% tax bracket.  So really the allowance is more of a transfer than an actual allowance.

At the moment it is also not too easy to claim the allowance as the only way you can do so is online and with the correct documents – which many people may not have. if you don’t have these then there should be a telephone helpline opening up later in the year and all payments will be backdated so that no-one will lose out.

To find out more about the new marriage allowance, including how to claim it, check out our previous article on the subject.

What are the Major Parties’ Policies on the Personal Allowance?

So with the general election coming up I thought it would be a good idea to try and find out what each party proposes to do with regard to the personal allowance. It has not been wholly easy to get this information but I have searched around and below is a summary of what I an find out:

Labour – I can’t actually find specific information on the personal allowance itself (that is not to say that there isn’t a specific policy on this but it is just difficult to find if there is) – however, they have pledged to reintroduce the 10% initial tax rate – one that was abolished by the previous labour government.

Both the Conservatives and the Liberal Democrats have pledged to increase the personal allowance to £12,500 – the Conservatives say this will be done by 2020 and the Lib Dems say they will do it within a year of coming to power.

UKIP have said in the past that they will increased the personal allowance to £13,500, the highest of all of the big players.

ISA Allowance 2015

So with the new tax year coming into play tomorrow (6th April 2015) there is an increase in the ISA allowance. The previous allowance was set at £15,000 for the tax year 2014/15 (although it was only increased to this level on 1st July 2014) and this is being increased to £15,240 for the tax year 2015/16.

The allowance is for all ISAs, whether they be for cash or for shares so make sure you are not over paying into separate ISA accounts.

Also don’t forget that you can’t carry over any of your unused ISA allowance so unless you can find someone who is open today (Easter Sunday) to take any extra payment for 2014/15 then you are probably too late.

There are also new rules being introduced in the autumn where savers will be able to replace money that is withdrawn from an ISA, as long as this happens in the same year – more to come on this when further details are available.

£11,000 Personal Allowance Announced

In the Budget today George Osborne announced that the personal allowance would be increased to £11,000 a year with effect from the 2017/18 tax year. This will be preceded by another increase in the personal allowance to £10,800 for the tax year 2016/17.

There have been a number of increases in the personal allowance over the last few years and these increases come after the recent increase in the personal allowance for the year 2015/16 to £10,600.

Can I Transfer My Personal Allowance?

The long question is: Can I transfer my personal allowance to my husband/wife/civil partner if I am not using it?

Well from April 2015 the answer is yes, you can transfer part of it. So, if you are earning less than the personal allowance in 2015/16 and your partner (i.e. wife/husband/civil partner) has earnings that are not taxed at any higher than the 20% rate, then you can transfer part of your personal allowance to them – currently the amount that you can transfer is £1,060.

This would mean that they would have a personal allowance of £11,660 instead of £10,600, reducing their tax bill by £212 for the year and your personal allowance would be £9,540. Therefore if you earn less than £9,540 a year then it is a no-brainer to transfer this allowance over to your partner.

However, your partner must not be in the higher rate tax bracket for the transfer to be allowed.

Also, HMRC have not yet declared how this transfer will take place although they have indicated that it will be via an online submission.

This may help families in particular where there is the traditional model of one parent staying at home to look after the children and the other working.

The standard level of income that you would need to earn to fall into the 40% tax bracket is £42,385. Of course this may be different in certain circumstances so you should take advice for your personal situation. So it is possible if you earn below this and your partner earns less than £9,540 then it is worthwhile for you to transfer over the portion of the personal allowance. OK so a gain of £212 a year is not massive but it’s certainly worth having.

Edited to add on 20 Feb 2015: you can register your interest in transferring part of your allowance here: https://www.gov.uk/marriage-allowance


Pensioners Could Earn £15,600 Tax Free

iStockbsheetFirstly I need to clarify the title of this article – this doesn’t only apply to pensioners but I wanted to highlight them as the most likely to benefit from this change in the tax rules that will start on 6 April 2015. Everyone can benefit, but it is more likely going to be pensioners that will have higher levels of savings income when compared to earned income (which includes pensions). Continue reading Pensioners Could Earn £15,600 Tax Free

What You Need To Know About UK Tax Allowances