Inheritance tax threshold increased to £1M, this is one of the headlines from yesterday’s Budget and appears to achieve a Pre-election pledge.
What are the rules now?
IHT is currently charged at a rate of 40% on the value of an estate above the tax free threshold which is currently £325,000 per person. This £325,000 allowance can be transferred to the surviving spouse provided none of this allowance was used on the first death. At present a couple can pass on assets worth up to £650,000 before IHT is payable.
How will this change?
Yesterday’s Budget introduced a “family home allowance” where a residence is passed on death to direct descendants such as a child or a grandchild. This allowance will be phased in as follows:
- £100,000 in 2017/2018
- £125,000 in 2018/2019
- £150,000 in 2019/2020
- £175,000 in 2020/2021
This allowance can only be used in respect of one residential property which has, at some point, been a residence of the deceased.
This takes the potential inheritance tax allowance up to £500,000 per person. The £175,000 “family home allowance” is also transferable to the surviving spouse. So this new IHT allowance may enable a couple to pass on assets worth up to £1M, including a family home, without having to pay any IHT at all.
As with all Budget announcements the detail is in the small print that will be released at some point in the future but it will be taken as positive news by families that have been drawn into the IHT net by rising property prices.