Last year the Institute for Fiscal Studies (IFS) predicted that the number of estates paying Inheritance Tax (IHT) is likely to increase four-fold from 2009/2010 (2.6%) to 2018/2019 (10%).
Much of this increase would have resulted from the increases in house-prices, chiefly in South East England, along with the effect of the static tax-free Nil Rate Band (NRB) of £325,000. The NRB has been frozen at that sum for 8 years and the failure to increase it in line with inflation over that period has been calculated to represent an effective increase in IHT of some 22%.
However this will now be off-set by David Cameron’s election manifesto promise to exempt the principal private residence valued up to £1 million from IHT. This is to operate as a family home allowance of £175,000, in addition to the existing NRB of £325,000, and which is to be transferrable to a surviving spouse or registered civil partner upon death. The aim is to enable a couple to pass on to their family home worth up to £1million upon the second death from IHT. There will be taper-relief on more valuable properties up to £2.35 million.
Whilst this provision was not mentioned in the Queen’s Speech on 27th May, hopefully it will appear in the second Finance Bill 2015, which is due to be published on 8 July.
Before those of us North of the border start celebrating, it is worth remembering that this new policy is likely to affect only around 2% of estates every year, the majority of which will be in the London area. According to the Conservative party the loss in revenue resulting from this will be recovered by restricting pension tax–relief from £40,000 to £10,000 on tax-payers earning over £150,000.
If you have any queries regarding the issues referred to in this article please contact Chris Wallace in our Private Client Department.