Summer Budget 2015 and the Changes to Inheritance Tax
One of the big news stories of the recent Summer 2015 Budget was the change brought by the Government to Inheritance Tax but is the change of any real benefit or is it perhaps more limited than we were initially led to believe?
The current position on Inheritance Tax
Currently, the Inheritance Tax threshold for an individual is a maximum of £325,000. This means that when you die, if your total estate including the value of your family home, is in excess of this sum, the excess is charged to Inheritance Tax at 40%. The exception is if you leave at least 10% of your assets to charity, this tax reduces to 36%.
If you are married or in a civil partnership then you can combine your individual allowances of £325,000 so that you can pass on assets worth up to £650,000 before Inheritance Tax is due. Anything over £650,000, including the value of your family home, is charged at 40%.
What changes has the Summer 2015 Budget made?
The basic tax threshold will remain at £325,000 for an individual and £650,000 for married couples or those in a civil partnership.
However, in addition to these thresholds, the new Budget has brought in an individual tax free allowance of £175,000 specifically for the family home on the proviso that the family home is left to direct descendants, these being children (including stepchildren and adopted children) or grandchildren of the deceased. The result of this change is that married couples and civil partners will be able to leave up to £1m tax free – a potential increase of £350,000.
What’s the catch?
On paper the above change sounds very positive but there are of course limitations:
- The change does not take effect until 6th April 2017 therefore the estate of anyone who dies before this date will not be able to take advantage of the new allowance.
- The change will be introduced in stages starting with £100,000 in tax year 2017/18 and increasing by £25,000 each year until it reaches the maximum of £175,000 in the tax year 2020/21.
This means that in 2017/18 the maximum that a married couple will be able to pass free of Inheritance Tax to their direct descendants will be £850,000. This figure being calculated by combining the total of a couple’s individual nil rate bands of £325,000 (£650,000) and their individual £100,000 family home allowance (£200,000).
- To qualify for the family home allowance, the home must be immediately inherited by direct descendants and, if you are using a trust, only certain types of trust will satisfy this condition.
- If the value of the property is over £2m then for each person the relief reduces by 50p for every £1 over. Therefore, if the property is valued at over £2.35m, no relief is available at all.
- Unmarried couples leaving their property to each other do not benefit from the new allowance.
- It is expected that the individual £325,000 tax threshold will remain fixed until 2020 meaning that people who do not own their own home, unmarried couples or couples without direct descendants, will be at a disadvantage. For those people unaffected by the change, the Government could have simply increased the tax threshold to a higher figure.
Whilst the Inheritance Tax change does herald good news for some, it still leaves many others in a tricky position when it comes to tax saving measures. The benefit of regularly reviewing your lifetime planning and your Will can therefore never be underestimated.