Currently everyone has £325,000 that they can pass on free of inheritance tax, known as the Nil Rate Band. Anything above this is taxed at 40%. The allowance is doubled for couples, so £650,000 can be passed on tax free. This has been the threshold since April 2009, but many of you will remember the manifesto pledges put forward from the Conservatives before last year’s election: the promise of a £1 million IHT allowance. Well, they got there in the end.
From April 2017, the Family Home Allowance will be introduced at £100,000 per person, gradually increasing to £175,000 by April 2020. With this new Main Residence Nil Rate Band (MRNRB) added to the original £325,000 threshold this will provide a total of £500,000 IHT allowance per person. So, if you are a couple this should lead to the promise of a total £1 million allowance for a couple (in theory).
Now for the ‘ifs’ and ‘buts’…
- To benefit from the new allowance the property must pass directly to children (natural, adopted or step) so if there are no children to pass to, the allowance will not be available.
- The property must be worth at least £350,000 in order to claim the full allowance, otherwise it will fall in line with the property value.
- If you are lucky enough to have an estate in excess of £2million, then for every £2 over this amount you lose £1 of the new allowance, which is an effective tax rate of 60%. This means that estates over £2.7 million will not benefit at all from the policy change.
However, perhaps the more positive side is that the small print states that even if death occurs before April 2017, the allowance will still be available and transferable to a surviving spouse. Furthermore, if you downsize to a smaller property, or sell completely after July 2015, you will still be able to claim the allowance.
It is probably fair to say that the £1 million allowance will benefit a lot of people but some it will not, which is likely to involve further debate or tweaking of policy. Additionally, the July budget extended the “freeze” on the standard Nil Rate Band until at least 2021, so those people who are not eligible for the new MRNRB might actually find themselves worse off.
Ultimately, due to the unfortunate complexities of the proposed legislation briefly outlined above, many may miss out on the new allowances. So the Conservatives pledge that “you’ll be able to pass on up to £1 million per couple completely tax-free” may have some way to go yet until it becomes a reality for all.
The information provided through the Equilibrium website is based on our opinion and is for general information purposes only. This blog is a summary of recent developments. It is not, and should not be construed as financial advice and should not be regarded as a substitute for advice in any particular case.