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The New Inheritance Tax Rules - Good News or Too Complicated to Understand?

The revised Inheritance Tax (IHT) rules announced by Chancellor George Osborne during the summer’s Budget speech have appeared to cause widespread confusion across much of the public.

Rather than raising the tax-free threshold for all, he announced a new allowance specifically for those who own their home and want to leave it to ‘direct descendants’ such as children or grandchildren.  This approach has consequently sparked questions about how the new rules will be applied in practice.

So, what has changed?

Everyone is currently entitled to pass on £325,000 of wealth tax free, regardless of whether they own a property. This is known as the tax-free threshold or ‘nil-rate band’. Married couples and civil partners are entitled to double the allowance to £650,000 before tax is payable.

However, from April 2017 the Government are introducing a new, additional tax-free allowance for people who own a home which will be referred to as the ‘family home allowance’ and will eventually be worth an additional £175,000 per person by 2021. Added to the £325,000 allowance that everyone gets and will remain frozen until at least 2020-21, this means a new allowance for property owners of £500,000 or £1 million for couples.

There are also a handful of criteria that needs to be fulfilled in order to qualify:

  • The property must have been a main home at some point
  • The property must be left to one or more direct descendants
  • If there is more than one property in the estate, only one will qualify for the family home allowance
  • If a home is sold or downsized after 8th July 2015, the family home allowance will still be available as long as assets of an equivalent value are passed to direct descendants 

Seven key facts for you to know

  • If you are single, have never married, don’t have children or you do not own a home then no allowance becomes available as the family home has to be passed to the children.
  • The value of the home is only relevant if it is lower than the family home allowance.  For example, if a £300,000 property was left to children following the death of the second spouse in 2022 after the full £175,000 allowance has taken effect, the family home allowance of £350,000 (2x £175,000 allowances) would be reduced to £300,000. The balance of £50,000 cannot be offset against the other assets.
  • If the house is owned in just one name, then the widow must have a clear interest and connection in the property in order to qualify for the allowance.  Therefore, it should be transferred into joint names for both spouses to qualify.
  • If a property has been sold after 8th July 2015, the new allowance will be available as long as an equivalent value is passed to children or grandchildren and as long as at least one partner is still alive when the new allowance comes in.  Anyone who sold or downsized before 8 July 2015 will not benefit.
  • If the first spouse dies before April 2017, all of their family home allowance can be transferred (provided that the estate of the first spouse did not exceed £2m). In this case, if the spouse were to die in 2020-2021 when the family home allowance is £175,000, you would also be entitled to the £175,000 allowance.
  • If you live in job-related accommodation the rules are slightly different. If the personal accommodation is the only residence you own at your death and you had either lived in it at some point or you could show that you intended on living in it then the allowance will be available.