Inheritance tax threshold lifted to £1,000,000
Jonathan Sleep explains what the Government’s increase to inheritance tax thresholds means for your family home.
George Osborne revealed in the Summer Budget that he would abolish inheritance tax when parents or grandparents leave the family home that is worth up to £1million or £500,000 for a single person. This new “family home allowance” will be phased in gradually between April 2017 to April 2020.
At present, a single or a divorced person’s inheritance allowance is £325,000 and a married couple or widow/widower has up to £650,000. From April 2017, the Government will gradually introduce the family home allowance for passing on an individual’s home, starting at £100,000 from April 2017. This will rise by £25,000 each year, until it reaches £175,000 in April 2020.
Added to an individual’s existing tax allowance, a married couple or widow/ widower will then be able to leave up to £1million free from inheritance tax.
However, an individual will only be able to use this new family home allowance on their main home and where the recipient of the home is a “direct descendant” which will include children, adopted children, step children, foster children and grandchildren.
The Government is also planning to include a provision to allow the downsizing of the family home. An inheritance tax credit for the family home allowance will be given to cover sale proceeds received, provided that these are left to a direct descendant. This is an attempt to encourage older individuals to free up larger homes for growing families.
Although the new family home allowance is good news and should help reduce inheritance tax for the majority of people, there are down sides to the allowance.
The main disadvantage of the allowance is that it provides no recognition for childless couples, spinsters, bachelors or those who rent their properties as opposed to owning it. It will also affect individuals who have placed their share of the family home into a discretionary trust, even if the only beneficiaries are their children and grandchildren, as this will not amount to being left to a direct descendant and the family home allowance will not be available.