As per their manifesto in 2010, the Conservatives have now ‘delivered’ on their long held desire to raise the Inheritance Tax (IHT) threshold to £1m.
The additional exemption will only be available for deaths after 5th April 2017 and at that stage will be limited to an additional £100,000, rising to £175,000 for deaths after 5th April 2020. The allowance will be transferrable to a surviving spouse or civil partner in the same way as can be done with the current Nil Rate Band (£325,000) and this will apply even if the first spouse (civil partner) has already died. So for a married couple (or civil partners) where the first spouse gave everything to the survivor, in addition to the two Nil Rate Bands, the survivor’s estate will have the benefit of two additional allowances of £175,000, making a total of £1m.
But, this is not quite so straightforward. It is not an exemption that will apply to any assets in your estate; this additional exemption is a main residence allowance and is limited to the value of your property, less any outstanding mortgage. If you have more than one house, you will be able to choose which one it applies to, subject to some restrictions.
Although the details are not yet known (a consultation is due, with the results to be published later this year), the intention is that the allowance can be claimed even if you have sold your main residence or downsized, provided the smaller property or replacement assets are left to descendants. Apparently, this concession is intended to encourage people to free up larger properties.
The additional allowance will be withdrawn (on a tapering basis) for estates worth more than £2m.
Some worked examples:
1. Mary (not married) has a home worth £200,000 and other assets of £300,000. The current IHT liability would be £70,000 (i.e. £500,000 – £325,000 = £175,000 @ 40%). From April 2020, it would be nil.
2. Harry (not married) has a home worth £1m and other assets of £1m. The current liability would be £670,000. From April 2020, it would be £600,000.
3. Jack and Martin (civil partners (CP’s)) have a home worth £400,000 and other assets of £600,000. On the second death, assuming the first CP left everything to the second CP, the current IHT liability would be £140,000. From April 2020, it would be nil.
4. Assuming the same characters and situation as in point 3 above, but the home is worth £1m and the assets are also worth £1m, the current IHT liability would be £540,000 and from April 2020, it would be £400,000.
This is perhaps a welcome relief for property owning parents, particularly in the South East, who, in recent years, have seen the value of their properties rise far quicker than the Nil Rate Band, which was initially intended to cover the value of their home. The Nil Rate Band, which used to rise each year, has been frozen at £325,000 since 2009/10 and is now intended to remain at that level until 2020/21, which will be a period of over10 years if implemented.