Unless exemptions apply, a deceased's estate (i.e. the value of savings, investments, property and some business assets) are generally subject to 40% inheritance tax on the value over £325,000 (the "nil rate band"). Thus, a typical single person with no exemptions/reliefs and with a property worth £350,000 and savings and investments worth £150,000 on death will pay £70,000 in inheritance tax. If the proposed new relief was in place now, the same individual should pay no tax provided he satisfies the criteria.
What about couples? If certain conditions are met, under present rules, a married couple/civil partners may benefit from both the £325,000 allowances when the survivor of the couple passes away, which can mean a total IHT "allowance" of £650,000. Interestingly, Mr Alistair Darling, then Chancellor of the Exchequer, introduced this rule in 2007 in response to a proposal by a younger Mr George Osborne to give a £1million inheritance tax allowance if he was ever Chancellor, which saw his party's ratings soar in the polls. Previous to that simplification, people made complex wills involving trusts, to make use of the £325,000 and save up to £130,000 in tax.
Is the £1million allowance just too good to be true? The proposal is that the Family Home Allowance will not come into force until April 2017 and will initially be £100,000 and gradually rising to £175,000 by 2020. Until April 2017, the £325,000 (which has been frozen since April 2009) will continue to apply, and will be frozen at that level until 2020. With the recovery in house prices and the improvement in the stock market, wealth has increased and so has the IHT collected by Mr Osborne. Between 2009/10 and 2013/14 the amount of inheritance tax paid rose by nearly £1billion (Source: HMRC), and it is set to rise further.
The Family Home Allowance is likely to be subject to certain proposed restrictions:-,
- it is intended only to apply to the home occupied as the family home, and not to any "buy to let" property; (the rules may allow the relief to apply to the sale proceeds of the family home also);
- it may only apply if the Family Home is left to direct descendants (for example, children and grandchildren) and there is no mention of inheriting by an unmarried partner;
- the relief will be tapered away for estates worth over £2million.
The good news is that any unused relief should be transferable to a spouse or civil partner in a similar way to the £325,000 allowance. This eventually adds up to the "£1million" inheritance tax allowance, being two lots of £325,000 plus two lots of £175,000!
For the keen IHT technicians amongst us, there are a couple of questions that spring to mind. For example, what happens to a property that has a large garden? Many large plots on which the family home is situated have "development potential", and a value premium to go with it. How much land will count as part of the "Family Home"? Another question is whether it will be possible to elect which of two or more occupied properties the Family Home Allowance can apply to? And what happens if a UK citizen considers that his Family Home is a property abroad? Many now own foreign property to live in but maintain ties (and therefore an inheritance tax liability) with the UK. We will have to wait for the details to emerge.
In the meantime, the advice is not to stop planning to save tax just because of the "£1million allowance" announcement. The new allowance is still some way off. The late Roy Jenkins in 1986 described Inheritance Tax as a "voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue"! Since then, the rules on paying inheritance tax have become significantly more complex, but there are still some easy ways to mitigate the liability. It is just a question of knowing how, and thus seeking advice.
Steven Came is a solicitor and full STEP member with over 10 years experience of advising on making Wills and saving inheritance tax. The views stated are based on his understanding of current proposals and current HMRC practice. The views expressed do not constitute professional and legal advice. Each individual's circumstances differ, and professional advice should be sought tailored to an individual's wishes and personal circumstances. You can contact Stephen on 01392 285000.