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Inheritance Tax Thresholds – the impact of the summer budget 2015
The summer budget hailed a rise in the available tax-free allowance for homeowners to one million pounds, but the reality of the revised scheme is less generous than many had originally hoped.
The current tax-free allowance on death being £325,000, a married couple or pair of civil partners are entitled to transfer unused allowance from the estate of the first to die, providing an increased allowance on the second death. This is done by percentage – for example if the first spouse or civil partner to die were to leave their entire estate to their spouse or civil partner, and they had not made any taxable gifts in the seven years leading to their death or eroded their allowance in anyway, then a full 100% allowance would be available to pass to the survivor. On the death of the second of the pair, the ‘surviving spouse”s estate would then benefit from an additional 100% of the tax free allowance at the date of the second death. At the moment, this would mean a maximum of £650,000 tax free allowance on the second death. Where the first ‘spouse’ died before 21st March 1972 a loophole excludes them from the scheme.
The summer budget 2015 launched a new ‘transferable main residence allowance’ to run alongside the main nil rate band. This is intended to provide a further sum to help cover the value of a jointly held property, beginning at £100,000 in April 2017 and rising to £175,000 per person by 2020/21. This then provides the much vaunted ‘one million pounds’ of tax free allowance on the combined estates in 2020/21.
A number of issues evidently arise with the new scheme, mainly:
1. all other assets held at the date of death, as well as gifts within seven years of death, still work to ‘use-up’ the nil rate band allowance, and only the allowance remaining can be offset against the value of property, topped-up by the new additional allowance
2. the children of single home-owners will only benefit from a single additional allowance to offset against the value of their inherited property, and those couples who do not choose either marriage or a civil partnership will still need to make arrangements to seek to protect their allowances on death as there is no automatic transferral of these between regular partners
3. those with properties worth over £2 million will be subject to additional taxation from 2017
4. detailed evidence needs to be retained of the value of jointly held property owned by a couple if they downsize to ensure that the full allowance can be claimed.
Those considering their tax position, lifetime or death gifting, or adjustments to their Wills in light of the above should contact us for more detailed, expert advice.