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Summer Budget: how the £1m IHT break for families works

The chancellor says he will phase in a £1 million inheritance tax threshold for family homes over the next five years.

 
Summer Budget: how the £1m IHT break for families works

Family homes worth up to £1 million will be able to be passed on free of inheritance tax (IHT) even if a person is no longer living in the property.

Under proposals set out in the summer Budget, a new IHT threshold will be phased in over the next five years.

Currently, the nil-rate-band on which 40% IHT is not liable is £325,000 per person and £650,000 per couple, but from 2017/18 an additional main residence threshold of £100,000 will be introduced. This means a couple will be able to pass on a property of £850,000 to their children or grandchildren tax-free.

The main residence threshold will be increased to £125,000 in 2018/19, to £150,000 in 2019/20 and to £175,000 in 2020/21, meaning in 2020 a home worth £1 million will fall outside of IHT. The additional threshold will then increase in line with inflation for subsequent years but the £325,000 nil-rate-band will remain frozen.

There were fears that the changes to IHT would encourage elderly people to remain in large family homes unsuitable for their needs in order to benefit from the relief rather than downsizing or going into care homes. However, the main residence relief will also be available to those who downsize or who no longer own a home after 8 July 2015 and their assets of an equivalent value to the main residence threshold will be able to be passed on tax free.

This means someone who sells their home who has up to £1 million in the bank will be able to give it to their family without fear of it being taxed. However, the government will be consulting on the final details of this part of the proposal.

The main residence relief will be limited to one residential property but families will be able to nominate which residential property should qualify if there is more than one. Properties that were not main residences, such as buy-to-let properties will not qualify.

Properties will only be able to pass to ‘lineal descendants’, said James Hender of accountants Saffery Champness, meaning only children or grandchildren will be able to inherit the property when the additional rate is being used. If a brother, sister, niece or nephew inherits the property they will not be able to make use of the additional relief.

Those with total assets worth over £2 million will not be able to benefit from the full additional relief. If an estate is larger than £2 million the government will ‘start to claw back the additional band [of relief]’, said Hender.

‘[The additional relief] will get tapered away,’ he said. ‘£1 will be clawed back for every £2 over £2 million.’

This means that by 2020 the additional rate for a couple will be £350,000 (£175,000 X 2). If an estate is worth £2.7 million then the entire additional relief will be clawed back and the couple will be left with the original nil rate band of £650,000 (£325,000 each).

‘The sting in the tail is [that the nil rate band of £325,000] is being frozen until 2020/11,’ said Hender. ‘[The changes mean] those with the most assets are paying the most tax.’

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18 comments so far. Why not have your say?

jolyon kay

Jul 08, 2015 at 17:58

And if I have already downsized, what benefit do I get? None?

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Denis Parkinson

Jul 08, 2015 at 19:29

Once again politicians interfering in how people run their affairs, what has it to do with Osborne or any other politician to whom I wish to leave my money or property to, I was persuaded to vote Conservative, never again, I will vote ukip next time.

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Basil Vaz

Jul 08, 2015 at 20:05

Hi Denis Parkinson, Not sure why you are so annoyed. You can leave your money to whom you like but if they are not your children or grandchildren your estate will pay IHT. No change.

Now however the change for the better is that you can leave assets worth up to a million (if you are a couple) to your children or grandchildren Tax Free.

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Joe D W

Jul 08, 2015 at 20:15

Do I understand correctly that those who rent but have an estate in excess of £325000 are not entitled to this extra band and are, therefore, subsidising those with bricks and mortar?

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Earny Madoff

Jul 08, 2015 at 20:25

Headline grabber, but in reality of very little practical application.

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Denis Parkinson

Jul 08, 2015 at 20:33

I find it annoying that politicians discriminate, the Conservative party suggested a 1 million inheritance tax band several years ago,no mention of having to leave money to children or grandchildren or any strings attached, they have failed to deliver. I have no children, but I have other relations to whom my money will be left, why can I not leave as much in inheritance tax free money as anybody else is entitled to do. Perhaps somebody will challenge it under the European convention on human rights, a lot of other things get challenged there.

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MikeR

Jul 08, 2015 at 23:35

@Denis Parkinson, I agree. I took on a partner with 3 children - those children are in line to receive my house when I die - why should they not benefit from the IHT break? I am getting very tired of the Conservatives hostile fiscal policies towards unmarried people.

I would add - this IHT proposal makes a mockery of Osbornes 2010 promise to abolish IHT. It also adds yet more complexity to our ridiculously complicated tax system. Why not just increase everyone's IHT tax free allowance.

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Wesley Kerslake

Jul 09, 2015 at 10:30

I agree with MikeR. Any additional tax break is welcome but why make it so complicated and tied only to property? Why not just simply increase the tax-free allowances but taper them on estates over £2m? Extra complication in the tax system is not what we need.

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FARMER TEDDY

Jul 11, 2015 at 09:34

Denis Parkinson...when you have voted UKIP and we leave the EU then your plan to challenge in the EU courts will have gone!

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Richard O'Shea

Jul 11, 2015 at 09:46

How does this all work when one of 'the couple' has left 'the family home', leaving children from that family, following divorce and long before the budget to set up another home with children from a different partner?

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sloccy123

Jul 11, 2015 at 10:08

I also agree with Mike R- The current tax system is overly complicated & nedds urgent reform. what is the point of setting up another Quango to simplify taxation & then proceed to make IHT even more complex than it was previously.

A £1 m threshold per couple without any strings would have been sensible & practical- Simples!

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Ian Phillips

Jul 11, 2015 at 10:13

@MikeR you need to adopt the children for them to "qualify" whether you can do this whilst unmarried is sure to be investigated now....

I, also, have no children but have nieces who are my "family" so I'm pretty disgusted by this discrimination.

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Richard Brinton

Jul 11, 2015 at 11:59

MikeR is right ; this is another layer of complication for the tax system. One can only suppose the Chancellor had to be careful not to lose too much revenue to the State in one go and has therefore added restrictions and phase-in steps to avoid sudden loss of revenue. One might say that this is a pledge that has been honoured but it leaves scope for future modifications. It is perhaps a consideration that the £1m threshold will be rendered out of date by housing shortage and price inflation very quickly and a £2m threshold should be the appropriate level paid for by an increase of 2% on the 40% income tax band rate. There are two conflicting concepts here;1 family perennity and 2 individual wealth.

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Denis Parkinson

Jul 11, 2015 at 15:49

Farmer Teddy, if we leave Europe we will still trade with them (they export more to us than we do to them), be able to run the country as it should be run. Save a fortune paying money to Europe, not being in CAP will make food less expensive. We may be able to rebuild our fishing fleets that got wrecked by European meddling. We need less political interference or in the European case less undemocratic bureaucratic interference, as a consequence perhaps everybody's tax could be reduced.

Sorry slightly off the original subject.

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FARMER TEDDY

Jul 11, 2015 at 18:10

but no recourse to EU courts to over turn poor UK law making...which you hoped would happen in your previous post.

Again off the subject I am afraid

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john brace

Jul 15, 2015 at 08:34

Denis - well said

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sloccy123

Jul 15, 2015 at 09:04

I agree 100% with Denis P- How many others feel the same about Europe ,I wonder?

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Anonymous 2 needed this 'off the record'

Sep 19, 2016 at 21:25

my dad passed away july 2016 we have not yet applied for probate the house is in his name only worth 420,000 if we wait until april 2017 will get the new iht rate applied

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