The changes to Inheritance Tax (IHT) announced by the Chancellor earlier this year should make it easier for individuals to leave their property to their families free of IHT, but how will the new rules work in practise?
In effect, the changes introduce an additional nil-rate band where a person leaves residential property to direct descendants. It should be noted that the new allowance is not yet in force; the relief will be introduced for deaths on and after 6th April 2017. It will start at £100,000 and will increase by £25,000 increments over the following three tax years to reach £175,000 in 20/21. It will be in addition to the existing nil-rate band (currently £325,000) so by 20/21, you will be able to leave £500,000 in total free of tax.
The additional allowance will only apply when the residential property is left to direct descendants or is ‘closely inherited’. The legislation includes step-children, adopted children and foster children within this definition.
For those with higher value estates, the new allowance will be of limited value. Where a person’s net estate is valued at over £2,000,000, the additional allowance will be reduced by £1 for every £2 over the limit.
The proposed legislation addresses a major concern for older people who may be thinking about down-sizing or who sell their property to go into long-term care. Where property is sold on or after 8th July 2015, you can effectively ‘bank’ the relief which can then be used when you pass on assets of an equivalent value to a descendant. However, it is fair to say that the details on this element are not yet clear and will be subject to further consultation.
The new allowance will not apply where a property is gifted during lifetime, even to direct descendants. So if a person transfers their home to their children and dies within seven years, the value of the transfer is potentially chargeable to IHT with no increased allowance available.
From these details you can see that there are inequalities with the new allowance. The political premise was to reward hard-working people who want to pass on their home to their children. But what if you are a hard-working person without children? Why can’t you have the benefit of the allowance for your nephew and niece who may be very deserving or for the benefit of your sibling with whom you have lived all your life? What if you have put your hard-earned wealth into assets other than a property; a business or investments? Why shouldn’t your estate also benefit? In reality, it would have been much simpler to increase the overall level of the nil-rate band so that all could benefit from it.
The legislation has not yet been enacted and there may yet be further changes. As the detail becomes clearer, it may be a good opportunity to review your Will and estate planning to ensure that the arrangements you have in place will enable you to take full advantage of the increased allowance.