Inheritance tax property threshold budget changesJuly 10th, 2015 by Dan Woodruff
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A major change has been announced into to how inheritance tax will be charged on your main residence. This creates a new inheritance tax property threshold, which could increase your ability to pass on assets up to £1 million free of inheritance tax from 2020. Ultimately, you could save inheritance tax of up to £140,000 as a result.
- Special inheritance tax property threshold applies to main residence only
- Applied in stages from 2017 to 2020
- Married couples can pass on their allowance to their spouse on death
- Tapered loss of allowance if your estate is worth more than £2 million
- Property must pass to children or grand-children
How does inheritance tax currently work
When you die you get an inheritance tax allowance (called the Nil Rate Band), which permits you to pass on assets up to £325,000 to anyone free of inheritance tax. Any other assets over this value are taxed at 40%. Married couples are permitted to pass assets free of inheritance tax to their surviving spouse, and can also pass on this inheritance tax allowance to their surviving spouse.
If you are married, on second death your inheritance tax allowance is doubled, leaving up to £650,000 of assets which can be passed on free of inheritance tax. If you use part of your allowance on first death, then the proportion remaining passes to your spouse on second death, and this percentage is used to calculate the remaining additional allowance on second death.
More information about the current inheritance tax rules.
Inheritance tax property threshold budget changes
The July Budget of 2015 announced a major change in how inheritance tax will work. You will be given an additional inheritance tax property allowance which can be used on your main residence only. This will eventually be worth up to £175,000 to each person, and can be passed on to your spouse on death, making the total applicable to your property £350,000.
When the full inheritance tax property allowance is available from 2020 your total inheritance tax allowance will be £1,000,000 for married couples and £500,000 for single people.
Here is how the inheritance tax thresholds will change in stages from April 2017:
This chart shows the gradual increase in property inheritance tax allowance from 2017 to 2020. The property inheritance tax threshold will start at £100,000 per person, and will increase by £25,000 per tax year to the full allowance of £175,000.
This can be passed on to your surviving spouse on death.
Property inheritance tax allowance changes:
- April 2017 – £100,000
- April 2018 – £125,000
- April 2019 – £150,000
- April 2020 – £175,000
Important points about the property inheritance tax threshold
- The inheritance tax property threshold will apply to your main residence only. You can not use this allowance towards other property such as buy to let, rental property or commercial property.
- If your main residence is worth more than the property inheritance tax threshold you can still use the original inheritance tax allowance for the remainder of the property value. If the property is worth less than the property allowance, the new allowance would not be passed on.
- The property must be passed to a direct relative, meaning your children or grandchildren.
- The inheritance tax property threshold will start to be lost if your estate is worth more than £2 million by £1 for every £2 of the value of your estate over £2 million.
- If you downsize your house there will be measures to allow you to retain the full value of the inheritance tax property threshold even if your new property is worth less after your move.
Some of these measures require further clarification, and we will update this article when the details emerge.
How will the new inheritance tax property threshold reduce your inheritance tax bill?
Obviously, this depends on your personal circumstances:
- Whether you are married
- How much your total estate is worth (including your spouse’s assets if you are married)
- How much your main residence is worth
It makes sense to seek advice as this can be a complex area, and there may well be additional factors not covered by this article.
- Single person
- House £300,000
- Other assets £300,000
In this example the new property inheritance tax threshold gets used progressively each year, saving up to £70,000 on the current inheritance tax bill by 2020. The inheritance tax bill in 2020 would be reduced to £40,000 from £110,000 under current rules.
- Married couple
- House £250,000
- Other assets £500,000
In this example the new property inheritance tax threshold gets used in combination with the current £650,000 allowance, saving up to £40,000 on the current inheritance tax bill from 2017. The inheritance tax bill from 2017 would be reduced to £0 from £40,000 under current rules. In fact, in this situation, the couple might have a bigger saving on inheritance tax if they owned a more valuable main residence (up to £350,000).
- Married couple
- House £350,000
- Other assets £650,000
In this example the new property inheritance tax threshold gets used progressively each year, saving up to £140,000 on the current inheritance tax bill by 2020. The inheritance tax bill in 2020 would be reduced to £0 from £140,000 under current rules.
- Married couple
- House £250,000
- Other assets £750,000
In this example the new property inheritance tax threshold gets used progressively each year, saving up to £100,000 on the current inheritance tax bill by 2020. The inheritance tax bill in 2020 would be reduced to £40,000 from £140,000 under current rules.
Despite the fact that the overall estate is the same value as in Example 3, the fact that not all of the property inheritance tax threshold has been used means that the inheritance tax savings are less. The couple would achieve a greater inheritance tax saving by owning a main residence worth more than £350,000.
These changes are obviously welcome. Despite this, Inheritance tax can be very complex and it makes sense to plan carefully for the future. There may be other ways to reduce your inheritance tax bill.
Contact us if you would like to discuss inheritance tax in more detail.