Well George did as was widely expected, increased Inheritance Tax (IHT) to £1 million threshold for married couples and civil partners. Let’s see what I got right and how it affects you.
Firstly, none of this kicks in until April 2017. Got that date right! However, we don’t get the full £500,000 allowance until 2020 as it is being brought in in stages. It is at that point that the full allowance is available.
George Osborne stated that within five years the number of people paying IHT was likely to double. By raising the IHT to £500,000 per person or £1 million for a legal couple then the vast majority of people will be taken out of the IHT net.
What’s the current rules?
Everyone is allowed £325,000 before their estate is subject to 40% IHT bill. That allowance has been frozen since 2009. Married and civil partners could share their allowance which meant that couple pass on up to £650,000 before the dreaded IHT kicked in.
The new rules as we understand them
As was predicted the Government are creating a “Family Home Allowance” (FHA) in 2017 which will start at £100,000 in 2017 and increase by £25,000 every year after until 2020/21 when it will reach £175,000. This is in addition to the £325,000 current allowance so an individual will eventually get £500,000 and a couple £1 million. Election pledge fulfilled.
Even better is that this is going to be linked to the Consumer Prices Index (CPI) as from 2021/22.
The downside is that estates worth in excess of £2 million will see this reduction at a rate of £1 for every £2 over.
The next downer is that the £325,000 threshold is remaining frozen until 2021. Any of the unused allowance can still be transferred to a surviving spouse or civil partner.
Though there is good news in that the FHA will be transferrable where the remaining spouse or civil partner dies on or after 6th April 2017, regardless of when the first died.
What property qualifies for the Family Home Allowance?
The property must have been
- the main home at some point
- be left to one or more direct descendants
The Government have been quite forward thinking here and not only included the usual children but also step children, adopted children, foster children and grandchildren. Let’s hope that some of the older legislation is soon amended to include these groups to get some uniformity. Don’t hold your breath though!
If the family has more than one property then only one can qualify even if the total value is less than £175,000.
Downsizing or moving on after the kids grow up?
Lots of people choose to downsize when the kids flee the nest. Well the good news is that if you do this after 8th July 2015 or even sell up totally after this date then you can still use the FHA to pass on assets of equivalent value under the same rules.
I’m guessing that this is to encourage older people to move and free up larger houses for younger families.
Overall, this looks a good move and will benefit the vast majority of people. What will be interesting is to see what the really creative financial advisors come up with to use this new allowance to its maximum. There are already a few ideas kicking around but when we know the detail we’ll put together another blog.
As always get in touch if you need our help