Family homes to be shielded in IHT reform

Chancellor George Osborne has confirmed a widely trailed measure to reduce or eliminate the inheritance tax (IHT) paid on many family homes.

In his 8 July Budget, Mr Osborne said that IHT – levied at 40 per cent on estates worth more than £325,000 – was originally designed to be paid only by the very rich.

A new allowance will be phased in from 2017, to be offset against a person’s home when it is left to children or grandchildren. This allowance will be set at £100,000 in 2017-18 and will increase year on year to £175,000 by 2020-21. It will be in addition to the existing £325,000 threshold, which Mr Osborne said would not increase before the end of 2020-21.

The new allowance – called the main residence nil rate band – will effectively create a £1 million IHT threshold by 2020-21, but only for married couples and civil partners who own or, in certain circumstances have owned, a home worth more than £350,000, and even then only when leaving it to direct descendants. The main residence nil rate band will also be withdrawn on a tapered basis for estates with a net value of more than £2 million.

While the move to protect family homes from inheritance tax will be welcomed by many people, the rules appear unnecessarily complex and many people – including those with no children or grandchildren – will gain little or no benefit from the changes. For example, a childless married couple could have to pay more IHT than their friends with a more valuable estate who leave it to their children or grandchildren.

Careful IHT planning will continue to be essential for anyone with a substantial estate – which could simply have been created by rising property values – as well as looking at steps to protect a family home from the impact of future care costs.

Anyone with an estate worth more than £325,000 is likely to need to review their wills ahead of the introduction of the new rules, to ensure that they are structured in the most effective manner, and Moore Thompson can provide expert advice to enhance the tax efficiency of arrangements. For more information, please contact us.