Gaenor considers how proposed inheritance tax changes will effect how much can be inherited tax free between parents and children.
Many of us will have, no doubt, spent quality time with our mothers and grandmothers over the weekend to celebrate Mothering Sunday. Even more of us will have sent cards and gifts in the post sporting slogans such as ‘The World’s Best Mum’. But will the proposed changes by the government to offer further tax-free allowances to children inheriting property from their parents’ estates give even more meaning to the gifts and cards we send on Mother’s Day and Father’s Day each year?
The proposed changes to inheritance tax allowances, due to commence from around Mother’s Day 2017, should not be ignored.
As Non and Charlotte have discussed in their recent blogs, the Finance Bill (No.2) 2015 has proposed changes to inheritance tax rules to provide a potential additional tax free sum of up to £175,000 per individual (up to £350,000 in the case of a married couple or civil partners) in addition to the current nil-rate band of £325,000, or £650,000 if the full nil-rate band is ‘inherited’ from a spouse or civil partner. This has led to this being coined, somewhat misleadingly, as the £1m inheritance tax threshold.
There are a number of conditions which must be met to benefit from this.The first is that it only applies to a person’s ‘residence’.Secondly, the residence can only be left to ‘direct descendants’.
This is to be known as the Family Home Allowance. The impact of this is that parents who leave their estate to their children, could together, leave up to £1,000,000 before inheritance tax is charged at 40%.
There are a few important points to bear in mind.
The Family Home Allowance, as the name suggests, cannot be used against property used, for example, in a family business. The allowance can only be used for property which was occupied as a ‘residence’ and it cannot be used for properties held on discretionary trust.
The proposed allowance will be subject to limitations for estates, which, when combined, exceed £2,000,000. The relief will ‘taper’ by £1 for every £2 over the £2,000,000 limit. This will mean a combined estate valued at £2,500,000 will only be able to use £100,000, or £50,000 per parent, of the FHA against the value of their property. Collective estates worth over £2,700,00 will therefore not be able to use the Family Home Allowance to reduce their inheritance tax liability.
Just like the nil rate band, the Family Home Allowance can be transferred to a surviving spouse or civil partner.
There is a key difference, however, between the Family Home Allowance and the transferable nil rate band; the Family Home Allowance will be assessed at the time of the death of the first spouse or civil partner. Therefore, if at the time of the death of the first party, the deceased does not qualify to make use of the £175,000 tax free allowance in relation to their share of a residential property then the benefit cannot be transferred to the survivor. Similarly, if at the time of death of the first, they only qualify to benefit from £100,000 of the Family Home Allowance, then this is the only addition that the survivor would inherit to use in addition to their own qualifying allowance at their death.
The intention is to phase the allowance in over a four year period. It is proposed that the allowance will come into force in April 2017 where it will be introduced at £100,000 threshold. The allowance will increase for the following three years until £175,000 is claimable by the tax year 2020-21.
So, although many families will be able to make good use of these proposed changes when they come into play in Spring 2017, families should be aware that, in order to ensure that estates are inherited in a tax efficient manner, planning and preparation is vital. Well drafted wills, the appropriate inclusion of trusts and the safe storage of supporting documentation will all be key to making the best use of both the current inheritance tax rules, and the proposed Family Home Allowance.