Inheritance Tax and Your Home

Inheritance Tax: a much debated tax in recent years and one which is increasingly affecting the wider population, rather than the super wealthy. With increasing property prices, more and more people are getting caught by the Inheritance Tax (IHT) trap. For many of them, the most frustrating part is that whilst they are technically asset rich, they are cash poor, so the IHT liability often means the family home has to be sold to satisfy HMRC.


The government has been promising changes to the IHT regime for many years, but the recent budget saw this actually become a reality, with the technicalities confirmed. Millions will not escape this unpopular death duty, thanks to a chunky new allowance.


Up until now, individuals had an IHT exemption of only £325,000 each, so £650,000 for a couple, before IHT becomes payable. This has been frozen at the current level since 2009.


In simple terms, they now have a “main residence allowance”. This has been set at £100,000 per person from April 2017 and will gradually increase to £175,000 per person by 2020/21.


The idea is, that a couple will have combined exemptions and main residence allowances totalling £1m by 2020/21.


A little known quirk to the rules is that widowed individuals who have remarried can also claim any unused allowance from their deceased spouse. So they could potentially have £500,000 of their own allowance and £500,000 from their deceased spouse, which when combined with their new spouse provides for a combined estate of £1,500,000 before IHT becomes payable.


The Chancellor has promised that this will take as many as 20,000 estates out of the IHT regime each year. Note however that the main residence allowance is progressively withdrawn once a couple’s estate, including their home, exceeds £2. The residence allowance is lost for joint estates in excess of £2.7m.


Contact our Financial Planning or Personal Tax departments for further advice and assessment of your likely IHT position.