One of the headline election manifesto proposals this weekend has been by the Tory party, which plans to reduce the impact of Inheritance Tax (‘IHT’) on UK home-owners. You may recall that this was originally proposed back in 2007, but did not materialise.
Under the current tax-law your estate will be liable for IHT on any value exceeding the threshold (Nile Rate Band – ‘NRB’) of £325,000, unless it passes to an exempt beneficiary (such as your spouse, registered civil partner or a charity) or it is of an exempt asset (such as certain business or agricultural assets). The rate of IHT is usually 40%, although there are exceptions, and the existing threshold has been frozen since 2009.
Furthermore, if you have inherited the whole of your spouses’s estate then your executors will be able to claim both that spouse’s and your own NRB, and therefore the IHT threshold on your death will effectively be £650,000 at current rates. The value of your estate is deemed to include most significant gifts made by you within the 7 year period leading up to the date of your death, and therefore such gifts may erode the tax-threshold available.
Under the new Tory proposals each spouse will have an additional £175,000 ‘family home allowance’, over and above their ‘general NRB’ of £325,000. This means that each will have a total IHT allowance of £500,000, or £1million as a couple, and the allowance will be transferrable as between both parties. The idea is that the vast majority of parents will be able to pass on their home to their children free from IHT liability.
This will be funded by restricting tax-relief on pension contributions by individuals earning over £150,000 per annum. The effect is that only home-owning millionaires will pay IHT, although as is often the case ‘the devil is in the detail’ and the family home allowance will be restricted for homes valued at more than £2million.
However, if you are not a home-owning millionaire or have an estate valued at more than £650,000, you may not need to get too excited. Indeed, the Treasury have stated that 90% of UK estates will not benefit from this relief. It is also worth bearing in mind that IHT may not be an issue if you need expensive care during your later years, as these proposals do nothing to ring-fence your estate from care home fees.
If you have any queries regarding the issues referred to in this article please contact our Private Client Department.