The changes to inheritance tax that were introduced in the 2015 Budget will soon come into effect, with some becoming the law as early as April 2017. With less than a year to prepare for these changes, it’s important to ensure you know what to expect and that you’re doing everything you need to in order to ensure you aren’t caught out.
The biggest shift is an increase in the value of estates that can be passed on before any inheritance tax is paid. At the moment, the limit is £325,000 per person, but from April next year that figure is set to go up thanks to a new “family home allowance”. This will be worth £100,000 for the first year, £125,000 in the 2018-19 financial year, £150,000 in 2019-20, before finally reaching £175,000 in 2020-21. Any further increases from 2021 onwards will be in line with the Consumer Price Index.
From April 2020, up to £500,000 of assets can therefore be passed on without any inheritance tax levied upon them. As the limit is applied to individuals, married couples and civil partners will be able to pass on up to £1 million of assets including property tax-free. Extra peace of mind comes from the fact that this combined amount will be upheld even if one partner dies before the new limit is introduced in 2017.
In addition to these changes, from July last year those downsizing their property are eligible for an “inheritance tax credit”. This means that you will still qualify for the increased threshold even if you sell an expensive property, as long as the majority of your estate is being left to your direct descendants.
It’s also worth remembering that the new total must include a property which is deemed a “family home” – the main property in which the owner or owners and their family live. Any additional properties, including buy-to-let, will still be added to the total size of the estate. Whilst the changes will bring down the cost of inheritance tax for anyone owning a family home, it has also been confirmed that the allowance will be gradually withdrawn for properties worth £2 million or more.
All of these changes mean that your financial planning should also change to keep up with the developments coming down the pipeline. If you’re unsure of how you need to alter your plans, or when you need to do so, the best course of action is to speak with a financial advisor.