Budget update - An Inheritance Tax windfall for home-owners?
Alison Elwess, looks at the implications of the latest changes to Inheritance Tax announced in George Osborne's budget.
George Osborne’s additional Budget on Wednesday 8 July 2015 did contain the increases to Inheritance Tax (IHT) allowances promised in the Conservative manifesto which had been notably absent from the Queen’s Speech following the election. However, as is often the case, the detail behind the headline ‘£1million IHT allowance for family homes’ is not quite as generous, or as straightforward, as may at first appear to be the case.
Firstly, the allowance is being introduced gradually, rather than being available in full immediately. The first tranche (£100,000 per person) will be introduced in the 2017-18 tax year, rising by £25,000pa until it reaches £175,000 in 2020-21. As the standard nil-rate band is frozen at £325,000 until this point, this gives a potential total individual allowance of £500,000 which can be left free of IHT by people dying from April 2020 onwards.
As with the standard nil-rate band, the additional allowance will be transferrable between married couples and civil partners, giving a total maximum allowance of £1million in these cases. However, for estates worth over £2million (net of liabilities, but before other reliefs/ exemptions are applied), the allowance will be tapered off and reduced by £1 for every £2 over this threshold, meaning that estates worth more than £2.35million (net) will not benefit from these changes.
The next point to bear in mind is that the additional allowance applies only to property which has been an individual’s main residence at some point, so it will not apply to second homes (and indeed will not benefit individuals who do not own a home at all). This means that the principal residence election which second-home owners have to make for capital gains tax purposes is likely to become even more important. It is also a condition of claiming the additional allowance that the property in question should be being passed on to a child, grandchild or other direct descendant. It is not clear at present what this will mean in practice where a surviving spouse has a life interest in the property before it is passed on, where second marriages and step-children are involved.
There has been some comment in the press that this additional allowance will create a perverse incentive for elderly people to continue living in large, expensive houses instead of downsizing, and also that elderly people who sell their homes upon going into residential care will be disadvantaged. To overcome these concerns, there is to be a consultation on applying the additional allowance to other assets purchased with the proceeds of sale of a property, but again, it is not yet clear how this will operate.
Who will benefit?
Finally, the additional allowance will of course only benefit those people whose estates are currently liable to IHT, so for any individual whose estate is worth £325,000 or less (or £650,000 for married couples and civil partners), there will not be any change.