Summer budget 2015: an outline of the new Inheritance Tax relief for family homes
On Wednesday, the Chancellor George Osborne announced in the summer budget that a special Inheritance Tax relief for family homes will be introduced in the tax year 2017/18.
This relief will take the form of an additional nil rate band of £175,000 per person by 2020. The threshold will start at £100,000 from 6th April 2017 and then gradually increase by £25,000 per year until it reaches £175,000 in April 2020.
It is already possible for married couples and civil partners to transfer each other’s unused nil rate band (which has been frozen at £325,000 since 2009) after the first death where everything passes to the survivor tax free. When added to this combined nil rate band of £650,000, home owning married couples or civil partners will soon have a tax free allowance of £1 million.
One of the provisos, however, is that the extra nil rate band will only be deductible from the value of the family home. There have therefore been concerns that elderly couples will be put off downsizing for fear that they will lose out on the additional tax threshold. The Government’s plan, however, has been amended so that the allowance will still apply to the cash which once formed part of the equity in the family home by way of an “Inheritance Tax credit”, so that anyone who downsizes now and dies after 2017 will be able to make use of the allowance.
A further condition for the relief to apply is that the family home must be left to children or grandchildren. Those couples without children will therefore be excluded, and unmarried couples without children will be worse off still as they are already unable to make use of the transferable nil rate band after the first death.
Where a single parent owns a property which passes to their children, only the individual nil rate band will apply so that only properties worth up to £500,000 will pass tax free. Still, this is an improvement on the current position where Inheritance Tax would be payable at 40% on the proportion of the estate which exceeds £325,000.
The “family home relief” is therefore a positive step to enable parents to provide for their children without there being any tax liability and provides greater scope for tax planning. However, the rules are likely to be complex and as a result the legislation will need to be carefully drafted.
For help and advice regarding Inheritance Tax, contact a member of our Wills & Probate team.Back to index