In Depth

Inheritance tax: how the changes will affect you

A new property allowance will shield homes worth up to £1m from IHT

The Conservative government’s latest Budget included a big change to inheritance tax aimed at cutting the bill for middle-income families. Here’s what is happening – and how it might affect you.

What are the rules?

At the moment if your estate is worth more than £325,000 when you die then your assets will be subject to inheritance tax. This means 40% of the value of your assets above the £325,000 threshold will have to be handed over to HMRC.

Married couples and civil partners are allowed to combine their allowance, so they can pass on assets worth up to £650,000 before inheritance tax is due. 

What is changing?

From 6 April 2017 the Government is adding a family home allowance to the tax-free allowance. It will start at £100,000 per person in 2017, rising to £175,000 by April 2020.

This means that individuals will eventually be able to pass on an asset worth up to £500,000 without any inheritance tax being due. For married couples and civil partners this adds up to a combined tax-free allowance of £1m.

However, if your estate is worth more than £2m then the family home allowance will gradually taper away.

Who benefits?

Thanks to soaring house prices more and more people have faced inheritance tax bills due to the value of their home.

This change is designed to allow middle income families whose only large asset is their home to pass down the generations without paying a whopping tax bill, which in some cases can only be met by selling up.

Who loses out?

Those without direct descendants. The draft legislation currently states that the family home allowance is only applicable if the assets are passed on to children, including stepchildren, adopted and foster children, and grandchildren.

So if you don’t have children or grandchildren, you may still face an inheritance tax bill.

What if I downsize?

There has been some clever thinking here to prevent the country’s housing market stalling as older generations hold onto the family home to benefit from the new allowance.

If you want to move to a smaller property then you will be eligible for an inheritance tax credit, which means you will still qualify for the new threshold as long as most of your estate is left to direct descendants.

What will it cost the government?

In 2013 the government netted £3.4bn from inheritance tax, a six-year high. The average amount paid was around £165,000. At the time it was estimated that residential property made up around a third of the total value of taxpaying estates.

The government intends to recoup the lost revenue with changes to pensions tax relief for high earners. From next year the annual pension savings allowance will taper depending on how much you earn.

Recommended

Is it worth paying off a student loan early?
University students graduate at Bath Abbey
Between the lines

Is it worth paying off a student loan early?

Nine financial solutions to ease you into retirement
A couple standing on a beach holding hands, seen from the shoulders down
Advertisement Feature

Nine financial solutions to ease you into retirement

What the Ukraine crisis might mean for ESG investing
A building in the City of London
Advertisement Feature

What the Ukraine crisis might mean for ESG investing

What is the gender housing gap?
Hand holding keys to a home
Fact file

What is the gender housing gap?

Popular articles

The mysterious Russian oligarch deaths
Vladimir Putin has previously deployed ‘extreme measures’ to crush opposition
Why we’re talking about . . .

The mysterious Russian oligarch deaths

Is Vladimir Putin seriously ill?
Vladimir Putin
Why we’re talking about . . .

Is Vladimir Putin seriously ill?

Depp v. Heard: what the latest battle has revealed
Amber Heard
In Depth

Depp v. Heard: what the latest battle has revealed

The Week Footer Banner