By Pete Simons
Partner and Tax Specialist
Moore Stephens
NEW inheritance tax rules for passing on the family home, including the introduction of the family home allowance start on 6 April 2017.
Changes announced in the 2015 Budget come into effect this year to allow people to pass on more to their direct descendants (children, step-children or grandchildren) without being taxed.
At the moment, individuals pay 40 per cent tax on all their assets above the £325,000 inheritance tax threshold. (Married couples can leave an estate worth £650,000 without paying inheritance tax).
From April 2017 this will rise to £425,000 (and to £500,000 by 2020). However, this total must include a family home which must be the main property. Buy-to-let and second properties will add to the total size of the estate as previously.
For couples, when one spouse dies the surviving spouse will inherit their partner’s allowance – meaning that by 2020 a married couple or those in a civil partnership will be able to pass on estates worth up to £1 million completely tax free. For estates valued above £2 million the additional nil-rate band will be tapered away.
The changes are particularly welcome as it means people will be able to pass on more to their children or grandchildren without being taxed.
However, rising house prices and a buoyant stock market mean that more people will be pushed over the IHT threshold. New figures released by the Office of Budget Responsibility (OBR) predict that the Treasury will take in an additional £1.8 billion more in inheritance tax than was forecast last year.
The new relief should be taken into consideration when drafting your will. Previously many people have left their share of a property in a discretionary trust for their children, however under the new rules the trust will not qualify for the family home allowance because the beneficiary is a trust and not a direct descendent, so existing wills should be reviewed urgently.
Business owners also need to plan carefully for the future. With Business Property Relief most businesses can be passed on free from IHT, however the value of the business will still be included in the total value of the estate for the calculation of available nil rate band.
The rules are particularly complicated, so specialist advice is recommended. Inheritance tax is one area where careful tax planning can really make a difference and we recommend you get a good accountant or solicitor to review your personal circumstances to ensure that you take advantage of all relief that you are entitled to.
Pete Simons is a partner and tax specialist at Moore Stephens, a top ten accounting and consultancy network with offices locally in Northampton, Corby and Peterborough. Telephone 01536 461900 or visit www.moorestephens.co.uk/eastmidlands