Inheritance tax – the new family home allowance

On behalf of Attwaters Jameson Hill posted on Friday, December 30th, 2016

Many families have found themselves facing a mounting Inheritance Tax (IHT) liability whilst doing nothing more than owning a family home that has steadily increased in value over the years. So the announcement of the family home allowance in the Summer Budget was widely-regarded as good news for families.

However, there have been some dissenting voices. Former MP Ann Widdecombe pointed out that being single meant she was excluded, and those wanting to leave property to members of their wider family, say nieces and nephews, are also excluded, as only direct descendants are set to benefit.

Timetable for change

The allowance, referred to as the ‘main residence nil rate band’ is being introduced in stages over 4 years, with a limit of £100,000 from April 2017, rising to £175,000 per person in 2020. This is in addition to the individual allowance for IHT which remains unchanged at £325,000.

Once the changes are fully implemented, each parent will be able to leave £500,000 in assets that include a ‘family home’ component of at least £175,000. As allowances can be passed from one partner to another on death, when the first partner dies, their allowance can be transferred to the surviving partner meaning that they will have an allowance of £1 million. Where a property is worth over £2 million, the family home allowance (but not the individual allowance of £325,000) reduces by £1 for every £2 of value above £2 million.

How will the £1m nil-rate band work in practice?

Whilst the £1m figure was quickly seized upon by the media, it won’t be fully in place until 2020.

Here’s an example:

David dies in May 2020, leaving his wife Susan his £175,000 share in their home plus £325,000 of other assets. She dies in February 2021 leaving an estate of £1 million, including the house worth by then £370,000, to their children. As the value of the house exceeds their combined main residence nil-rate band (£175,000 x2) and Susan has a double individual allowance of £650,000 (£325,000 x2) no IHT will be due. Currently, an estate of this size would face a charge of £140,000.

What to do next

Before the changes are implemented in 2017, it would be a sensible move to review your Will especially if discretionary trusts are included. IHT planning is a complex area and professional advice is essential to ensure your family benefits from the new rules.