Much was made in the Budget coverage about a new £1m ($1.56m, €1.44m) inheritance tax (IHT) allowance on properties that are passed on death to direct descendants – either children or grandchildren.
The headline rate of £1m is based on a £325,000 nil-rate band for both spouses plus a new additional property IHT band also for both spouses. This additional nil-rate band will be £100,000 in 2017-18; £125,000 in 2018-19, £150,000 in 2019-20 and only reach £175,000 in 2020-21.
However, Eamonn Daly, a partner at Lodders Solicitors warned: “The devil is in the detail.”
Only if these allowances are not used on a person’s death because the entire estate passes to the deceased’s spouse or civil partner exempt from IHT, would it be possible for the survivor to benefit from all of the allowances and gain a combined tax free amount of £1m, he said.
To gain the maximum allowance would also require that the entire estate was worth at least £350,000 and less than £2m. There will be a tapered withdrawal of the additional nil-rate band for estates with a value of over £2m, at a withdrawal rate of £1 for every £2 above this threshold.
“The new thresholds on property values are misleading if the headline announcements are taken out of context,” said Daly.
Band frozen
Legislation to allow taxpayers who downsize or sell their home after 8 July 2015 to benefit from the new rules, will be introduced in next year’s Finance Bill, but here too, Daly warns, it will be vital to delve into the detail of the new rules.
“The general inheritance nil-rate band has been frozen at £325,000 since 2009 and this will not now increase until at least 2021,” he said.
“The freeze was ostensibly introduced to pay for the policy to cap care costs payable by the over 65s and younger adults with disabilities but this has itself now been delayed until 2020.
“If the main nil-rate band had increased with inflation since 2009 it would today have been around £400,000, which highlights that the new threshold figure perhaps isn’t as good as the headlines would lead us to believe.”
Had the government just increased the main nil-rate band, rather than introducing more complexity by adding the new allowance for those owning homes, some of the potential problems that may arise would have been avoided, he said.
