Synopsis: The Conservatives have announced their plans for inheritance tax if they are returned to power in the next General Election. From 2017, they would increase the nil rate band to £500,000 where part of the assets left at death include a family residence.
It has long been known to be the case that the Conservative Party have wished to increase the inheritance tax nil rate band. However, whilst they have been in Government, this desire has been blocked by the Liberal Democrats – their coalition partners.
Now, as part of their General election manifesto policy, the Conservatives are promising to increase the inheritance tax nil rate band where an individual is passing on a family home – see our earlier bulletin here [link: BU15B22]. The objective would be that parents will be able to leave a home worth up to £1million to their beneficiaries free of IHT from 6 April 2017. Currently on the second death of a married couple, a house worth £1million and owned by the surviving spouse would cause an IHT liability of £140,000 (£350,000 @ 40%).
The cost of the new rules would be funded by savings arising through placing restrictions on the amount that additional rate (45%) taxpayers could contribute to registered pension plans.
Full details are not yet known but the intention is that the relief would work as follows:-
• A couple would be able to pass on £1million per couple completely tax free (provided part of the that legacy related to a family home)
• This would be achieved by the introduction of a new dedicated tax free allowance specifically to protect the family home from inheritance tax
• This new ‘family home allowance’ will be worth £175,000 per person and would be in addition to the nil rate band allowance of £325,000
• This will mean that the estates of individuals who die and pass on assets worth up to £500,000 that include a family house will not be charged to inheritance tax
• As with the existing nil rate band, the ‘family home allowance’ will, if unused, be transferable between couples
• Provided the deceased’s estate includes a family house, the total value of assets that married couples can pass on tax free will rise from £650,000 to £1million saving IHT of £140,000
• Under the Conservative plans, the new allowance will be gradually withdrawn from estates worth more than £2 million with estates worth more than £2.35 million losing all entitlement to the new allowance
The tax saving arising from the family home allowance will be funded by reductions in the tax breaks available on registered pension plans to addition rate taxpayers (i.e. those with income of more than £150,000 per year).
Currently such additional rate taxpayers are eligible to make pension contributions of up to £40,000 per annum (assuming they have not triggered the special £10,000 MPAA).
However this £40,000 annual allowance will taper away progressively until it reaches £10,000 for people earning £210,000 a year or more. Pension contributions above this level will be taxed at 45%.
This seems to be a case of increasing the tax on additional rate taxpayers to help the beneficiaries of private residencies whose value fall between £650,000 and £1 million.
The average home price across the UK is currently worth £193,000 although in parts of London and the South East of England properties can easily reach £1 million. And so undoubtedly the benefit of this measure will depend on where somebody lives.
As a tax break on private residences, the measure may also have an impact on house price inflation.
It should be noted that the full technical details of this measure are awaited and so what we describe above may change. Also if the Conservatives are returned to power with a coalition partner, that coalition partner may not agree to this measure.
Why not talk to the professionals about properly managing your finances
Call us on 01273 457100020 7871 538701403 333666
Or email us on email@example.com
Or just take a look at how we help our clients www.opusgold.com