Budget 2015: Practical applications of the new Inheritance Tax rules

Inheritance tax, once only paid by the super-rich, has become a middle-class plague as house prices have soared. But millions will now escape this unpopular ‘death duty’ thanks to a chunky new allowance announced by the Chancellor. For all bar the wealthiest, inheritance tax should no longer be a problem. The new rules mean family members will be able to inherit as much as £1 million from 2020 without paying 40% death tax – so long as the estate goes to children or grandchildren and includes a family home worth between £650,000 and £2m. Where the value of the net estate of the deceased (not just the property concerned) exceeds £2 million, the additional band will be tapered away at a rate of £1 for every £2 that the value of the estate exceeds this limit, meaning there is no incremental additional band on estates worth £2.7m or more. The change is being phased in over the next five years but will eventually boost an individual’s tax-free allowance with an ‘additional main residence allowance’ of £175,000.

The changes are complex but the following scenario is an example of how certain families will be able to save more tax:

A widow or widower dies, leaving his or her estate worth £1.5million, including a £750,000 family home, to their children. Currently the bill would be £340,000 – or 40% of the value of assets above the couple’s allowance (known as a nil-rate band) of £325,000 each or £650,000. In 2020, the bill would be cut, as the children can use the ‘additional main residence allowance’, as well as the nil-rate band. Jo Bateson at KPMG says:

"The new allowance is a welcome relief for those with houses valued from £650,000 to £1million as they are now able to pass them on to the next generation without an inheritance tax charge. But for those with higher value properties, the relief tapers away to nothing after £2.7million."

The Government has hinted that parents will be able to downsize without losing the extra allowance. Bateson says:

"These provisions have yet to be announced in detail but we hope it will spur families to release equity to let younger generations get on the property ladder."

Sources: www.thismoney.co.uk (Article updated: 2015/0714)