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Summer Budget 2015 – Changes to the Inheritance tax rules

14 July 2015 #Private Client

George Osborne has confirmed that the inheritance tax threshold will rise for married couples who want to pass on wealth to their children and direct descendants. The government will achieve this by introducing a family home allowance on top of the existing inheritance tax nil rate band.

At the time of writing, the current Inheritance tax nil rate band is £325,000 for an individual, frozen until 2021. Married couples can combine their allowances so that the surviving spouse can leave up to £650,000 to their children before having to pay inheritance tax on anything over that at a rate of forty percent.

The new family home allowance will apply when a main residence is passed on death to direct descendents such as a child or grandchild. The allowance will be up to £100,000 in 2017-18, rising by £25,000 each subsequent year until it reaches £175,000 in 2020. As with the current Inheritance tax nil rate band, the family home allowance will be transferrable between spouses, giving an additional £350,000 family home allowance on top of the £650,000 already available to married couples. The total sum that married couples will be able to leave to their children free of inheritance tax will therefore be £1 million by 2020.

The wealthiest estates will not qualify for the family home allowance. The relief will be tapered away for estates with values in excess of £2 million. Many family homes in London and the South East are therefore likely to fall on the wrong side of this threshold.

The family home allowance will also be available when a person downsizes or ceases to own a home on or after 8 July 2015 - provided assets of an equivalent value, up to £175,000 in 2020-21 are passed on death to direct descendants. The government gives the following example:

An individual might choose to downsize from a £200,000 home to a home worth £100,000. They could still benefit from the maximum £175,000 allowance in 2020-21 if they leave the home and £75,000 of other assets to direct descendants. They will only be liable for inheritance tax if the total estate exceeds £500,000.

An additional measure introduced from April 2017 is that inheritance tax will be payable on all residential property owned by non-domiciled residents, regardless of their residence status for tax purposes, including property held indirectly through an offshore structure. A more detailed note setting out the scope of this proposal has been published alongside the Summer Budget and a full detailed consultation will follow later this year in the Finance Bill 2017.


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