Inheritance Tax Rules To Change in 2017
The Chancellor announced in his 2015 Summer Budget a new Transferable Main Residence Allowance. The Allowance will start at £100,000 in April 2017, and will increase to £175,000 per person by 2020/2021.
This is additional to the main nil rate Inheritance Tax band, effectively raising the IHT free allowance to £500,000 per person. Where a family home is jointly owned by a married couple who want to leave it to their children, the total Inheritance Tax exemption will be £1,000,000.
The table below (taken from the Summer Budget) shows the impact on various estate values.
Value of joint estate
(including family home) |
IHT due under current rules |
IHT due in 2020 |
Change in tax due |
| £500,000 |
Nil |
Nil |
£0 |
| £1,000,000 |
£140,000 |
Nil |
-£140,000 |
| £1,500,000 |
£340,000 |
£200,000 |
-£140,000 |
| £2,000,000(1) |
£540,000 |
£400,000 |
-£140,000 |
| £2,700,000(2) |
£820,000 |
£820,000 |
£0 |
(1) Tax-free allowance withdrawn at rate of £1 for each £2 above £2,000,000 threshold
(2) No extra allowance is applied above £2,700,000
Higher inheritance tax for larger estates
The new allowance is in addition to the £325,000 (per person) tax-free allowance. If someone leaves a property to their children or grandchildren it will take their total IHT exemption to:
| 2017/2018 |
2018/2019 |
2019/2020 |
2020/2021 |
| £425,000 |
£450,000 |
£475,000 |
£500,000 |
Married partners can claim unused inheritance tax allowance from a deceased spouse. For couples with a property to leave this means they will effectively double their combined exemption.
The total exemption will rise each year to:
| 2017/2018 |
2018/2019 |
2019/2020 |
2020/2021 |
| £850,000 |
£900,000 |
£950,000 |
£1,000,000 |
An estimated 20,000 estates will be removed annually from IHT as a result of the changes. However, the new main residence allowance is progressively withdrawn when a couple’s estate
(including the family home) reaches £2m. The allowance reduces at rate of £1 for every £2 over the £2m limit.
Joint estates worth £2. 7m or more will have no extra allowance. The estate will be taxed on
everything over £650,000.
Comparison Inheritance Tax Calculations
Under the old rules
Mr and Mrs Carter jointly own a house worth £750,000. They also have various other assets and savings worth £250,000, making the estate worth a total of £1m.
Mr Carter dies in 2004, leaving all of his estate to his wife. When Mrs Carter dies her beneficiaries are able to claim a double allowance of £650,000 on a total estate worth £1m. £350,000 will remain, to be taxed at 40%. The Inheritance Tax payable is £140,000.
Under the new rules
Say Mrs Carter dies in 2020 (after the allowance reaches its full rate) the transferred allowance from Mr Carter will be £325,000 plus £175,000, giving a total of £500,000.
The allowance for Mrs Carter will also increase from £325,000 to £500,000. The entire estate is therefore worth £1M and is effectively free of any Inheritance Tax. This is because the first £650,000 takes the couple’s savings and assets of £250,000, plus £400,000 of the family home value out of tax.
The remaining £350,000 of their property is covered by the new transferable main residence allowance of £175,000 per person.
For any specific advice on the subject of this article, please contact me by telephone on 01246 555111, or email rob.woodhead@brmlaw.co.uk.
Rob Woodhead – Director & Head of Wills and Probate at BRM Solicitors
