The IHT Threshold – and the devil that lies in the detail
In the run up to the election, Mr Osborne promised that parents will be able to pass £1m down to their children or grandchildren, without paying tax. In his summer Budget, the Chancellor published the detail behind the changes. Some, particularly in the farming sector, will be back to square one.
So where does the £1m come from?
Everyone has an IHT allowance of £325,000, called the nil-rate band. Married couples are then able to double up to £650,000. There is no tax to pay on the death of the first spouse, and provided he leaves his entire estate to his widow, she may leave up to £650,000 to her descendants, tax free, together with any assets that benefit from 100% Agricultural Property Relief and Business Property Relief. These thresholds will remain at the same level until 5 April 2021.
We now have an additional allowance called the “main residence nil-rate band.” This is being introduced in stages as follows:
The amount available is the lower of the allowance and the value of the residence at the time of death.
These allowances will be transferrable from one spouse to the next where the second spouse dies on or after 6 April 2017. This is the case even if the first spouse died before the new rates came into force.
From 6 April 2020, the combined allowance is therefore 2 x £325,000 plus 2 x £175,000, a total of £1m.
The catch is that the new allowance is not available where the estate of the deceased, before the deduction of any reliefs is less more than £2.35m. The allowance is tapered away for estates between £2m and £2.35m.
Agricultural Property Relief and Business Property Relief are therefore ‘added back’ to the estate when calculating whether the new, additional allowances are due.
For example, if you have property (other than a farmhouse) and assets worth £1m and farmland and assets worth £2m qualifying for 100% APR/BPR, your total estate after APR/BPR will be £1m. You might then think that from April 2020 no IHT would be due. But because the total estate before APR/BPR is £3m, the nil rate band will be £650,000, not £1,000,000.
The amount on which IHT will be charged will therefore be £1m less £650,000 = £350,000, and IHT of 40% will be chargeable – £140,000. Exactly the same as before the new rules were introduced.
There is better news for those who ‘downsize’ to a smaller, less valuable residence. The main residence nil rate band will be available based on the value of the original property, rather than the smaller property. Detailed rules will be published as to how this will work in practice.
If you have any questions about how these rules will affect you, please contact David Bennett on 01772 821021.