In their 2015 election manifesto the Conservative party pledged to take the family home out of tax by increasing the effective inheritance tax threshold for married couples and civil partners to £1million.
The implementation of this is not – as most people assumed it would be, a simple increase in the tax free allowance available on death (the ‘nil rate band’) – this will remain frozen at £325,000. Instead, an additional allowance ‘the residence nil rate band’ is to be introduced from April 2017 starting at £100,000 and increasing annually by £25,000 to its maximum of £175,000 by 2020/21. So that means that by 20/21 a couple will have 2 of each allowance between them totalling £1million – right? Well in some cases yes, but not in all cases, because the new allowance will not be available to everyone – and there will be restrictions as to which estates will qualify.
So how does an estate qualify? Well, the extra allowance applies specifically to residential property included in an individual’s estate on death which is left to ‘direct descendants’. So – if you own a property worth at least the amount of the new allowance, you are leaving it to children and your estate is below £2million then you will qualify. The relief is withdrawn by £1 for every £2 the estate exceeds £2m – so for an individual it is lost completely at £2.35m and for a couple at £2.7m. Crucially, the estate is calculated before any reliefs – so if it is shares in a private company that is tipping your estate over the £2m mark, although these may qualify for Business Property Relief resulting in no tax being payable on your estate, you will not qualify for the new allowance. You will not however qualify for the extra allowance if your property is being left to other relatives or friends, or into most types of trust. For example, if you are leaving your property to grandchildren at the age of 21 (for instance if your son or daughter has predeceased you), and when you die your grandchildren have not yet reached 21, this would count as a trust, and that share of your estate would not qualify for the extra allowance
The extra allowance is not automatic and has to be claimed, and if you don’t meet the qualifying criteria it simply won’t be available. The conditions and strings, definitions and amendments are too complicated to fully include in this article and individual circumstances need to be fully assessed. It is very important therefore to get good advice, review your will and consider how you hold assets to try and ensure that you plan as best you can for the future.