Inheritance Tax Rules To Change in 2017

The Chancellor announced in his 2015 Summer Budget a new Transferable Main Residence Allowance. The Allowance will start at £100,000 in April 2017, and will increase to £175,000 per person by 2020/2021.

This is additional to the main nil rate Inheritance Tax band, effectively raising the IHT free allowance to £500,000 per person. Where a family home is jointly owned by a married couple who want to leave it to their children, the total Inheritance Tax exemption will be £1,000,000.

The table below (taken from the Summer Budget) shows the impact on various estate values.

Value of joint estate
(including family home)
IHT due under current rules IHT due in 2020 Change in tax due
£500,000 Nil Nil £0
£1,000,000 £140,000 Nil -£140,000
£1,500,000 £340,000 £200,000 -£140,000
£2,000,000(1) £540,000 £400,000 -£140,000
£2,700,000(2) £820,000 £820,000 £0

(1) Tax-free allowance withdrawn at rate of £1 for each £2 above £2,000,000 threshold
(2) No extra allowance is applied above £2,700,000

Higher inheritance tax for larger estates

The new allowance is in addition to the £325,000 (per person) tax-free allowance. If someone leaves a property to their children or grandchildren it will take their total IHT exemption to:

2017/2018 2018/2019 2019/2020 2020/2021
£425,000 £450,000 £475,000 £500,000

Married partners can claim unused inheritance tax allowance from a deceased spouse. For couples with a property to leave this means they will effectively double their combined exemption.

The total exemption will rise each year to:

2017/2018 2018/2019 2019/2020 2020/2021
£850,000 £900,000 £950,000 £1,000,000

An estimated 20,000 estates will be removed annually from IHT as a result of the changes. However, the new main residence allowance is progressively withdrawn when a couple’s estate
(including the family home) reaches £2m. The allowance reduces at rate of £1 for every £2 over the £2m limit.

Joint estates worth £2. 7m or more will have no extra allowance. The estate will be taxed on
everything over £650,000.

Comparison Inheritance Tax Calculations

Under the old rules

Mr and Mrs Carter jointly own a house worth £750,000. They also have various other assets and savings worth £250,000, making the estate worth a total of £1m.

Mr Carter dies in 2004, leaving all of his estate to his wife. When Mrs Carter dies her beneficiaries are able to claim a double allowance of £650,000 on a total estate worth £1m. £350,000 will remain, to be taxed at 40%. The Inheritance Tax payable is £140,000.

Under the new rules

Say Mrs Carter dies in 2020 (after the allowance reaches its full rate) the transferred allowance from Mr Carter will be £325,000 plus £175,000, giving a total of £500,000.

The allowance for Mrs Carter will also increase from £325,000 to £500,000. The entire estate is therefore worth £1M and is effectively free of any Inheritance Tax. This is because the first £650,000 takes the couple’s savings and assets of £250,000, plus £400,000 of the family home value out of tax.

The remaining £350,000 of their property is covered by the new transferable main residence allowance of £175,000 per person.

For any specific advice on the subject of this article, please contact me by telephone on 01246 555111, or email rob.woodhead@brmlaw.co.uk.

Rob Woodhead – Director & Head of Wills and Probate at BRM Solicitors

About the author

Rob Wodhead is director and head of wills and probate at our Chesterfield town centre office.

For more advice on this topic or related matters:

01246 564031 rob.woodhead@brmalw.co.uk

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