Minimising inheritance tax for your family


inheritance-tax-for-web.jpgThousands of homeowners will be able to pass on more of the value of their homes free of inheritance tax, or escape these death duties altogether, as a result of a new £175,000 allowance for property announced in the summer Budget.
The allowance will significantly lift the threshold at which the tax becomes payable for home owners who leave their property to their children.
It follows a Tory election pledge to take most family homes out of inheritance tax. The new relief of £175,000 per person will be phased in from 2017 on top of the existing tax-free allowance for IHT of £325,000, or £650,000 for married couples and civil partners.
It means that from 2020, married couples and civil partners will be able to pass on up to £1 million of housing wealth free of inheritance tax to their children. IHT is payable at death at the stinging rate of 40 per cent above the tax-free allowance, called the “nil-rate band”.
It is charged on the value of property (minus any mortgage) as well as other wealth including savings, shares and ISAs — though whatever you leave to your spouse or civil partner is automatically exempt from inheritance tax.

Announcing the additional allowance in the Budget, Chancellor George Osborne said the Government was acting to prevent the number of families paying inheritance tax from doubling over the next five years.
Called the “main residence nil-rate band”, it will apply only to residential property left at death to children or other direct descendants. Buy-to-let properties will not qualify, says HM Revenue & Customs.

And, as with the existing tax-free amount, the new allowance can be transferred to a spouse or civil partner. This means that in the common situation where couples leave everything to each other, when the first partner dies their assets are automatically exempt from inheritance tax and the unused allowance passes to the survivor. 
In effect, this will double the new allowance that applies when the surviving partner dies, from £175,000 to £350,000.

The Chancellor also allayed concerns that older home owners who downsized would lose the new relief. With effect from the Budget, people who sell up or downsize will retain the tax break — a provision welcomed by experts for potentially increasing the supply of family homes for sale.