8th July 2015
The Chancellor George Osborne is raising inheritance tax threshold on family homes by £175,000 from the current £325,000 to £500,000 from 2017.
For couples – taking both individual allowances together – this means that it will be possible to pass a house worth £1m on to your children or grandchildren without becoming liable for IHT.
The Chancellor has also said that the reforms will also ensure that those who downsize do not lose any of the allowance. But some experts suggest that by keeping the threshold the same for other assets, families may face an estate planning dilemma.
Andy Zanelli, head of retirement planning, AXA Wealth says: “Plans announced in today’s Budget to introduce an addition to the inheritance tax (IHT) threshold for property to £1m certainly make things interesting. Any increase in the IHT allowance to allow for the sharp rises in house prices in the last decade was always going to be a popular move as it would effectively take aspirational households out of the reaches of a tax that was never intended to catch them. The new additional threshold leaves us with an uneven playing field and an interesting financial planning dilemma. Those people looking at estate planning now need to consider whether to downsize their home and potentially invest money elsewhere or leave their money tied up in property, knowing they can pass it on to their children free of IHT.
“The consequence of this move means assets within an estate are treated differently: my wife and I can leave a £1m property to our children without them incurring an IHT charge, however should we choose to downsize and perhaps invest some of that money, anything above the current nil rate band of £325,000 would incur a 40% tax charge.”
“Added to this, today’s move is likely to help very few families. Figures verified by the Office of Budget Responsibility suggest that less than 10%* of the estates that will be subject to IHT in 2015/2016 will be taken out of the IHT net. Is this an announcement that seems better than it will actually be in practice?”
He says on this tax year, the figure may be 4,000 households
Andy Cumming, Head of Advice at Close Brothers Asset Management, says: “This Budget represented one step forwards and two steps back. Inheritance tax has been crying out for reform for years, and Osborne’s allowance for passing on family homes marks a leap and a bound in the right direction. Since the threshold was last changed in 2009, house prices have risen by 44%, meaning an increasing number of individuals have become liable, simply through virtue of being long-term occupants of their family home.”