The government was keen to trumpet its new Inheritance Tax (“IHT”) allowance of £175,000, specifically for the family home when it is left to children or grandchildren, allowing most couples to leave £1m tax free. However, the reality has proved, as usual, to be more limited and more complicated.
First of all, the allowance will only apply to deaths occurring after April 2017. Then it is going to be introduced in stages, ie £100,000 in the tax year 2017/18, then rising by £25,000 each year, reaching £175,000 in the tax year 2020/21. The government’s forecast is that rising house prices will in any event be bringing more estates into tax, so that by 2021, the same number of estates will be subject to IHT as is the case now – about 37,000 each year. However, less tax will be payable.
The relief will reduce once an estate reaches £2m, disappearing completely for estates over £2.35m.
Our main concern, when the proposal first arose, was that by tying the allowance to property, it would discourage elderly people from downsizing, or from selling their properties if they went into care. The government has indicated that these issues will be addressed. If a person ceases to own a home after 8th July 2015, they can still claim the allowance for “assets of an equivalent value” which are left to direct descendants. We don’t know how this will work in practice as yet but clearly it would be sensible for people to keep good records of their property transactions.
It would have been a lot simpler for the government simply to have increased the IHT threshold to £500,000 but they obviously decided they couldn’t tolerate the loss of tax which would have resulted. The basic IHT threshold is going to remain at £325,000, which has implications for trusts and also for “generation rent”, who never buy a property but nevertheless accumulate wealth. Further, unmarried couples leaving their property to each other would not qualify for the new allowance and the tax planning which we usually do to enable unmarried couples to use both their IHT allowances will not extend to the new allowance either.
George Osborne seems to be turning into Gordon Brown with his penchant for over-complication! We will continue to comment as further details of how the allowance will work in practice become available.
Please note, if you’d like to discuss this with us further, we will be hosting a stall at the Nantwich Show on 29th July and will be happy to see you then.
Myerson Solicitors LLP provide specialist advice relating to wills, probate, probate disputes, inheritance tax planning, trusts and all aspects of family law to clients in Manchester and Cheshire.