Member Article

More to new family home IHT allowance

~~A chartered tax adviser and partner at law firm Lodders, is warning homeowners to look into the detail of the changes to inheritance tax (IHT) thresholds on family homes introduced in the Summer Budget, saying they are more complex than the majority of people realise.

“The devil is in the detail,” says Lodders’ Eamonn Daly, a specialist in estate planning and tax advice, “and whilst the changes have the potential to benefit a great number of taxpayers and take them out of the IHT net, the new thresholds on property values are misleading if the headline announcements are taken out of context.”

The draft provisions for the IHT ‘family home allowance’ were included in the Finance Bill that was published following July’s Budget. The Bill’s provisions will implement the Conservative manifesto pledge to enable some family homes to be passed on free of IHT.

According to Eamonn, danger lies in people only seeing the headline figures and apparent savings: “People are assuming that all estates worth less than £1 million will not suffer IHT and therefore they won’t take important steps to ensure their affairs are organised so that their estates can benefit from the new legislation,” he says.

From 2020, individuals will have the new £175,000 allowance to be set against a residence passing to direct descendants in addition to the current nil-rate band of £325,000 which is available for their general estate. “If these allowances are not used on a person’s death because the entire estate passes to the deceased’s spouse or civil partner exempt from IHT, it would be possible for the survivor to benefit from all of the allowances via a combined tax free amount of £1 million,” explains Eamonn, “but only so long as their entire estate was worth less than £2 million and provided they owned a residence worth at least £350,000.

“Legislation to allow taxpayers who downsize or sell their home after 8 July 2015 to benefit from the new rules, will be introduced in next year’s Finance Bill, but here too, it will be vital to delve into the detail of the new rules.

“The general inheritance nil-rate band has been frozen at £325,000 since 2009 and this will not now increase until at least 2021. The freeze was ostensibly introduced to pay for the policy to cap care costs payable by the over 65s and younger adults with disabilities but this has itself now been delayed until 2020.

“If the main nil-rate band had increased with inflation since 2009 it would today have been around £400,000, which highlights that the new threshold figure perhaps isn’t as good as the headlines would lead us to believe. Had the government just increased the main nil-rate band, rather than introducing more complexity by adding a new allowance for those owning homes, some of the potential problems that may arise would have been avoided, and it would have been a much more simple way of reducing the IHT burden on taxpayers.”

The family home allowance will potentially be available for deaths after 6 April 2017 starting at £100K and then increasing by £25K per tax year until it reaches £175K from 6 April 2020. The allowance will be tapered by £1 for every £2 the value of the estate passes the £2 million mark, before any reliefs and exemptions apply.

Lodders Solicitors LLP is an established and thriving law firm based in Stratford upon Avon, Cheltenham and Henley in Arden. The firm is recognised as a leading private client law firm, offering specialist advice to both private individuals and privately owned businesses, including its highly regarded work in the agricultural and real estate sectors. For more information, visit: www.lodders.co.uk.

This was posted in Bdaily's Members' News section by Lodders Solicitors LLP .