April 2017 welcomes the implementation of the inheritance tax – family home allowance – but is it really the £1million increase to the inheritance tax threshold that the government promised us?
In short, no! However, it does provide an inheritance tax threshold of up to £1million if you are married/in a civil partnership, own a house and have children.
Currently, everyone has an inheritance tax threshold of £325,000, meaning that when you pass away no inheritance tax is paid on the first £325,000 of your assets. After that, inheritance tax is charged at 40%.
From April 2017, the government will add the inheritance tax – family home allowance, to the existing £325,000 threshold. The additional allowance will be phased in as follows:
- £100,000 for 2017 to 2018
- £125,000 for 2018 to 2019
- £150,000 for 2019 to 2020
- £175,000 for 2020 to 2021
It will then increase in line with CPI for subsequent years.
The allowance will allow an individual to (eventually) pass on assets worth up to £500,000 without paying inheritance tax. Although, there are conditions:
- The additional family home allowance can only be used for property (or funds relating to a property sale within a certain timeframe). If the deceased had more than one property then the Personal Representative can choose which property the allowance should apply to, although the property cannot have been a buy to let property that the deceased had never lived in.
- The property must be left to a direct descendant of the deceased i.e. a child, but this does include a step-child, adopted child or foster child.
- If, however, the net value of your estate is worth more than £2million, the additional allowance will be tapered away by £1 for every £2 that the net value exceeds £2million. This taper threshold will increase in line with CPI from 2021 to 2022 onwards.
So, where does the £1million saving come in?
Similarly, to the current inheritance threshold, any unused family home allowance can be transferred to the surviving spouse’s estate when they pass away. This means that if the full inheritance tax threshold and family home allowance is available, a married couple/civil partners, who have a property which qualifies for the family home allowance and it is being left to a direct descendant – that couple could, post April 2020, pass assets to children worth £1million.
Therefore, although the new inheritance rules are not the £1million threshold the government alluded to – it can still mean massive savings for some.
For example, Bill and Mary are married, Bill has savings and investments of £300,000 and Mary has savings of £200,000, they have a joint savings account worth £100,000 and the family home is currently worth £550,000. They have two adopted children, Jack and Jenny.
Bill passes away in July and leaves his sole assets to Mary and the joint assets pass automatically to Mary.
Mary then passes away in November leaving everything to Jack and Jenny. The total value of Mary’s estate is £1.15million.
If Bill and Mary pass away pre-April 2017, the inheritance tax position will be:
Bill’s inheritance tax threshold of £325,000 is available to transfer to Mary as everything was left to her; meaning Mary now has an inheritance tax threshold of £650,000 in total.
Total assets of £1.15million less £650,000 inheritance tax threshold = £500,000
£500,000 will then be subject to 40% inheritance tax = £200,000 tax bill
If Bill and Mary pass away post-April 2020, the inheritance tax position will be:
Bill’s inheritance tax threshold of £325,000 is available to transfer to Mary; meaning Mary now has an inheritance tax threshold of £650,000 in total. Further, Bill did not use his family home allowance and therefore the full allowance can be transferred to Mary’s estate; meaning Mary now has a family home allowance of £350,000.
Savings and investments of £600,000 less £650,000 inheritance tax threshold = £50,000 inheritance tax threshold remaining
£550,000 property less £50,000 inheritance tax threshold less £350,000 family home allowance = £150,000
£150,000 will then be subject to 40% inheritance tax = £60,000 tax bill
Therefore, post 2020, there would be a saving of £140,000 inheritance tax.
Should you have any queries regarding your inheritance tax positon please do not hesitate to contact the Private Client Team.
T: 029 2034 2233
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