How changes to Inheritance Tax could affect you
Oct 7, 2015
Important changes to inheritance tax were made in this year's summer budget with the intention of reducing the amount of tax people have to pay on their family homes.
Since 2009, the threshold for inheritance tax has been set at £325,000 per person. Anything over this amount is subject to a 40% tax when you die, including savings and assets such as property. If you're married or in a civil partnership then you can add together your allowances for anything you own jointly, meaning that you won't be taxed on your first £650,000 worth of collective savings and assets.
However, in the summer budget the government announced a new 'family home allowance' to come into effect on April 6th 2017. This means that in addition to the £325,000 threshold (which will remain fixed until at least 2020) you will get an additional tax free amount that applies to the value of your home.
In the 2017-2018 tax year, this extra amount will be £100,000 and that will increase by £25,000 every April. So by 2020 the total tax-free allowance for a single person will be £500,000 (£325,000 + £175,000). For couples this will be £1m.
The extra allowance only applies to a property that was the main family home at some point, not other assets or savings. If you sell your property and move to a smaller residence, however, you could qualify for an 'inheritance tax credit' meaning you can still apply the family home allowance to the value of your new home plus any profit you made. It can only be passed on to direct descendants, meaning children, grandchildren or adopted/foster children.
The new rules are designed to reflect the rising value of residential property, particularly in London and the South-East. As they're intended to help ordinary middle-class families rather than the very rich, for estates worth over £2m the family home allowance will be gradually withdrawn.
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