Inheritance Tax Changes
From 2017, parents and grandparents will be able to leave homes worth up to £850,000 to their children free from inheritance tax (this value will rise to £1 million by 2020).
As the inheritance tax allowance can be passed between spouses, when the first partner dies, their £500,000 allowance transfers upon death, giving the survivor the £1 million allowance.
The new allowance in practice
The current allowance remains unchanged whereby no inheritance tax is charged on the first £325,000 of someone's estate. Above this threshold, the charge is 40%.
However, a new tax-free band worth £175,000 per person, to be used solely on their main residence, will be introduced, therefore increasing total allowances to £500,000 per person where a property is involved.
The change will be introduced gradually, starting in 2017, with the full £175,000 additional threshold coming into effect in 2020.
Properties worth over £2 million
£1 will be deducted from the new 'main residence threshold' for every £2 of value over £2 million. Therefore, those with properties worth over £2.7 million will see the main residence threshold reduced to zero (whilst still keeping the main threshold of £325,000).
If you want to downsize now to release cash, you will still be able to pass on the pre-downsize house value to your dependents, as if you had kept the more expensive property until death. From today anyone who downsizes their property and who dies after 2017 will still get the main residence threshold added to their allowance.
Current inheritance rules
- Currently everyone is allowed to leave an estate valued at up to a £325,000 without their beneficiaries paying tax on it. This is called the nil-rate band.
- Anything they leave behind above £325,000 is subject to tax of 40% (or 36% if they leave at least 10% of their assets to a charity).