The Million Dollar Rule

January 19, 2017
Inheritance Tax

The rules around Inheritance tax are changing in April 2017, as a past gift from the now retired George Osborne is due to come in to effect. In his Summer budget speech of 2015, he announced that anyone who owned a home, and wanted to leave it to their ‘direct descendants’ would now be able to with an additional nil rate IHT allowance.

The current IHT allowance, which has been frozen in place until the end of 2021-22 and stands at £325,000 per person, will be joined by what is becoming known as the ‘family home allowance’. Anything above these amounts is currently going to experience “The Grim Harvest of Death” (Sir Winston Churchill) which was a very elegant description of the 40pc IHT tax charge of your estate over your personal allowance.

As of the 6th April 2017, where you are planning to leave your main family residence to a direct descendant, in other words; Children, stepchildren, adopted children, foster children and grandchildren, you will receive an additional IHT allowance, on top of the current nil rate band that is in place. This new allowance is going to slowly graduate to £175,000 per person over the next 4 years as follows;

  • £100,000 for 2017 to 2018
  • £125,000 for 2018 to 2019
  • £150,000 for 2019 to 2020
  • £175,000 for 2020 to 2021     
  • It will then increase in line with CPI for subsequent years (www.gov.uk)

This in effect means that an individual leaving a home worth £500,000 to a direct descendant from 2020-21 tax year, can do so without incurring any IHT tax. For a couple in the same situation, it means they have a £1million IHT free allowance on their main property, and are able to transfer this additional perk between married couples and people in civil partnerships.

This change in allowance will be hugely beneficial to many, with a potential IHT saving of £70,000 if the full £175,000 additional nil rate band is utilised against a property in 4 years’ time, which will hopefully help to reduce the level of IHT your family have to pay, given the ever-increasing value of many properties throughout the UK.

There are as always however, conditions.

The property must be, or have been, your main home at some point, meaning no other properties qualify, and must be passed on to a direct descendant. Anything other than a family home, such as cash and investments will not qualify.

Also, estates valued above £2million will experience a tapered rate of relief, losing £1 of relief for every £2 the estate is valued above £2million, although for many this last point won’t be too much of a concern.

As you can see, this is clearly a benefit worth having, and is going to help a large number of people retain what they have spent their lives working so hard for, however, this is only one element of estate planning, and should you want to know more, then please contact Contractor Wealth to see how they can help you retain as much of your hard-worked harvest.

The value of investments may fall as well as rise and past performance is not a guide to future returns.

Financial advice is given by Contractor Wealth Management Limited which is an appointed representative of Intrinsic Mortgage Planning Limited and of Intrinsic Financial Planning Limited who are authorised and regulated by the Financial Conduct Authority. Intrinsic Financial Planning Limited and Intrinsic Mortgage Planning Limited are entered on the FCA Register (http://www.fca.org.uk/register) under reference 440703 and 440718.