Summer Budget 2015
IHT & the Family Home Allowance
Background
Before this year’s General Election, an important feature of the Conservative manifesto was the pledge to increase the Inheritance Tax (“IHT”) nil rate threshold for family homes to £1 million. The Summer Budget saw the Chancellor deliver on the pledge by announcing the Family Home Allowance, however not everyone will receive the full benefit.
Nil Rate Band
Currently the nil rate band for IHT is £325,000 per person and this has been unchanged since 5 April 2009. Where a spouse or civil partner pre-deceases their partner, any unused nil rate band may be passed to the survivor leading to a maximum total nil rate band on their eventual death of £650,000.
Family Home Allowance
From 6 April 2017, a £100,000 Family Home Allowance (“FHA”) will apply in addition to the nil rate band. This will apply when a main residence is passed on death to direct descendants such as a child or grandchild. The allowance will increase each year until it is worth £175,000 as detailed below:
| 2017/18 | £100,000 | |
| 2018/19 | £125,000 | |
| 2019/20 | £150,000 | |
| 2020/21 | £175,000 |
From 6 April 2021, the allowance will increase in line with inflation.
The allowance will be transferrable between spouses and civil partners in the same way as the nil rate band so that in April 2020, when combined with the nil rate band, an individual will have total allowances of £500,000. Therefore, a married couple should be able to transfer a home worth up to £1 million to their children without incurring any IHT.
Downsizing
The FHA will also be available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value are passed on death to direct descendants. For example, an individual might choose to downsize from a home worth £200,000 to a home worth £100,000. They could still benefit from the maximum allowance of £175,000 in 2020/21 if they leave the home and £75,000 of other assets to direct descendants.
Restrictions and criteria
The main restriction is that the allowance can only be used to gift the property to a direct descendent – a child or grandchild. This includes legal guardian relationships as well as step and adopted children and grandchildren.
An important point is that unmarried couples and single individuals cannot benefit from the full £1 million allowance and that the allowance only applies to qualifying residences. The allowance is also tapered down for estates worth over £2 million.
These changes will be included in Finance Bill 2016 and will come into effect from 6 April 2017, leaving time to revisit Wills and make any amendments necessary to take full benefit of the allowance.
This is a general overview of draft legislation which may change before it receives Royal Assent and becomes law. If you want further details of the new allowance or you are concerned about your potential IHT liability generally please contact our Tax Director, Jenny Marks.
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