The £500k Inheritance Tax Exemption (well not really)
There was more than a little expectation that in July’s Budget Chancellor Osborne would raise the Inheritance Tax threshold from its current £325,000. Well here is the first piece of bad news. It is firmly frozen until April 2021.
It doesn’t matter much, a lot of people will say, because there is a new exemption of £175,000 covering your main residence, so adding that to the £325k gets you to half a million.
Well, no. The new exemption is to be phased in. It doesn’t even start until April 2017, when an extra £100k is given. It then rises in stages, but the full amount doesn’t come into effect until April 2020.
Also it needs to be understood that the exemption is tied to property value (although see below regarding downsizing). If you choose to rent a property and invest your money elsewhere, or live in a property valued at less than the exemption, you will not get any or all of the extra amount. Quite what the logic is of tying the exemption to residential property as opposed to other assets may be a moot point. The legislation seems to be based more on an emotional sentiment relating to the family home rather than an objective tax policy. Also it may encourage the older generation to hang on to residential property which may not be in the best interests of the family as a whole and may leave the value exposed to care fees.
Finally on the negative side the relief starts to taper off on estates worth more than 2 million.
A few pieces of good news when we do eventually get there: It is clear that couples will get a double amount, so from 2020 the million pound IHT exemption will be possible, but only in the right circumstances. It appears that if you downsize, your exemption will remain equivalent to the original property value. Quite how this will work is unclear.
Can you buy a £175k property, hold it for a short while and then downsize? If you own more than one property you can nominate the one to which the exemption applies. However it will probably be the case, as with the Capital Gains Tax exemption, that you will have to occupy it to some extent and not simply nominate, say, a valuable buy-to-let.
The above remarks must be taken to be preliminary thoughts only. In dealing with complex tax matters of this sort, Budgets tend to be statements of intent rather than detailed legislative proposals. There will now be a period of consultation and of framing detailed rules, so it is quite likely that things will change. What is clear is that Inheritance Tax is very much still alive and kicking, so proper IHT advice is as essential as ever.
For Inheritance Tax advice please contact Mike Rapps on 0117 906 9456.