Inheritance Tax from 2017 - what’s changing?

Everyone is currently entitled to pass on £325,000 of wealth tax free, regardless of whether or not they own a property. This is known as the “nil-rate band”. Any assets in an estate above this amount incur an IHT charge of 40%.

Married couples and civil partners are entitled to double the allowance, or £650,000 before tax is payable.

From April 2017 the Government is introducing a new, additional tax-free allowance for people who own a home. This is called the “family home allowance”. It will eventually be worth an additional £175,000 per person. Added to the £325,000 allowance that everyone gets, this means a new allowance for property owners of £500,000 – or £1m for couples.

This additional perk will also be transferable between married couples and civil partners, even if one partner dies before its introduction in 2017.

It will be introduced gradually over four years, with the allowance worth £100,000 in 2017-18, £125,000 in 2018-19, £150,000 in 2019-20 and £175,000 in 2020-21.

Estates that are worth more than £2m will lose some or all of the family home allowance, which will be tapered at a rate of £1 for every £2 over the £2m threshold.

The family home allowance and the taper threshold will increase in line with inflation as measured by the consumer prices index (CPI) from 2021-22.

The existing £325,000 nil-rate band will remain frozen until at least the end of 2020-21.

To qualify for the family home allowance, the property must have been the main home at some point and must be left to one or more direct descendants. This includes children, stepchildren, adopted children and foster children, and grandchildren, but not other relatives such as a nieces and nephews.

If there is more than one property in the estate, only one will qualify for the family home allowance.

If a home is sold or downsized on or after July 8 2015, the family home allowance will still be available as long as assets of an equivalent value are passed to direct descendants.

In a valuable quirk, if one partner dies before April 2017 the survivor will be able to use both of their family home allowances when he or she dies. This is regardless of other factors such as whether the first spouse owned a share in the property or had already passed a share to children.

Frequently asked questions about the new rules

Can I leave my house to other family members?

I have assets worth £600,000, which include my home. I am single, have never married and have no children. I intend to leave my assets to my siblings. Will I qualify for the £175,000 family home allowance?

No. The relief will be available only when the family home is passed to children (including stepchildren, adopted and foster children) and grandchildren.

Does the value of the house matter?

Will a married couple who leave a family home valued at £300,000 and other assets worth £700,000 be eligible for the new allowance, in the same way as a couple who leave a family home valued at £700,000 and other assets of £300,000?

The value of the home is relevant only if it is lower than the family home allowance. If a £300,000 property was left to children following the death of the second spouse in 2022, for example, after the full £175,000 allowance has taken effect, the family home allowance of £350,000 (2 x £175,000) would be reduced to £300,000. The balance of £50,000 cannot be offset against the other assets.

What if the house is owned in just one name?

Our £350,000 house is in my wife’s name only. We both have other assets, worth around £400,000 each. We have “mirror” wills leaving everything to the surviving spouse, and then to our children. Would we both qualify for the family home allowance?

The deceased must have an “interest” in the property to qualify for the allowance, so it should be transferred into tenants in common and 2 x Life Interest Trusts set up within the Wills for both spouses to qualify.

The only situation where this wouldn’t be necessary is if the first spouse dies before April 2017. So if the husband above dies before April 2017 while the house was in his wife’s sole name, he would still qualify for the allowance.

What if we don’t own a house?

We have cash of £2m and do not own a house. What is our total allowance?

If you do not own a home, the additional allowance is unavailable and the maximum nil-rate band you are entitled to is £325,000 per individual, or £650,000 for a couple.

Our home will be sold on death. Will we miss out?

I have been married to my second wife for 25 years. We are both in our late eighties. I have one son and my wife has no children. We own our property jointly.

In our wills, we sell everything including our property and distribute the proceeds to our beneficiaries. Does this mean that we will not benefit from the new allowance?

The family home allowance is available only when a property is directly passed to children or grandchildren. However, if a property is sold after July 8 2015, the new allowance will be available as long as an equivalent value is passed to children or grandchildren and as long as at least one partner is still alive when the new allowance comes in. Anyone who sold or downsized before July 8 2015 will not benefit.

I’m already widowed. What’s my new allowance?

I am a widower – my wife died four years ago. While my current allowance is £650,000, what additional allowance will be available? Is it as a single person at £175,000 or will my wife’s allowance also be applied, up to the maximum of £1m in 2020?

Where the first spouse dies before April 2017, all of their family home allowance can be transferred (provided the estate of the first spouse did not exceed £2m). In this case, if you were to die in 2020-21 when the family home allowance is £175,000, you would also be entitled to your wife’s £175,000 allowance.

Thy Will Be Done’s advice over the past few years proves to be invaluable yet again.

The way forwards is:

Making you and your partner tenants in common and placing Protective Property Life Interest Trusts within your Will to be 100% assured of maximum protection and maximum allowance upon death.

 Inheritance Tax - what’s changing?

Everyone is currently entitled to pass on £325,000 of wealth tax free, regardless of whether or not they own a property. This is known as the “nil-rate band”. Any assets in an estate above this amount incur an IHT charge of 40%.

Married couples and civil partners are entitled to double the allowance, or £650,000 before tax is payable.

From April 2017 the Government is introducing a new, additional tax-free allowance for people who own a home. This is called the “family home allowance”. It will eventually be worth an additional £175,000 per person. Added to the £325,000 allowance that everyone gets, this means a new allowance for property owners of £500,000 – or £1m for couples.

This additional perk will also be transferable between married couples and civil partners, even if one partner dies before its introduction in 2017.

It will be introduced gradually over four years, with the allowance worth £100,000 in 2017-18, £125,000 in 2018-19, £150,000 in 2019-20 and £175,000 in 2020-21.

Estates that are worth more than £2m will lose some or all of the family home allowance, which will be tapered at a rate of £1 for every £2 over the £2m threshold.

The family home allowance and the taper threshold will increase in line with inflation as measured by the consumer prices index (CPI) from 2021-22.

The existing £325,000 nil-rate band will remain frozen until at least the end of 2020-21.

To qualify for the family home allowance, the property must have been the main home at some point and must be left to one or more direct descendants. This includes children, stepchildren, adopted children and foster children, and grandchildren, but not other relatives such as a nieces and nephews.

If there is more than one property in the estate, only one will qualify for the family home allowance.

If a home is sold or downsized on or after July 8 2015, the family home allowance will still be available as long as assets of an equivalent value are passed to direct descendants.

In a valuable quirk, if one partner dies before April 2017 the survivor will be able to use both of their family home allowances when he or she dies. This is regardless of other factors such as whether the first spouse owned a share in the property or had already passed a share to children.

Frequently asked questions about the new rules

Can I leave my house to other family members?

I have assets worth £600,000, which include my home. I am single, have never married and have no children. I intend to leave my assets to my siblings. Will I qualify for the £175,000 family home allowance?

No. The relief will be available only when the family home is passed to children (including stepchildren, adopted and foster children) and grandchildren.

Does the value of the house matter?

Will a married couple who leave a family home valued at £300,000 and other assets worth £700,000 be eligible for the new allowance, in the same way as a couple who leave a family home valued at £700,000 and other assets of £300,000?

The value of the home is relevant only if it is lower than the family home allowance. If a £300,000 property was left to children following the death of the second spouse in 2022, for example, after the full £175,000 allowance has taken effect, the family home allowance of £350,000 (2 x £175,000) would be reduced to £300,000. The balance of £50,000 cannot be offset against the other assets.

What if the house is owned in just one name?

Our £350,000 house is in my wife’s name only. We both have other assets, worth around £400,000 each. We have “mirror” wills leaving everything to the surviving spouse, and then to our children. Would we both qualify for the family home allowance?

The deceased must have an “interest” in the property to qualify for the allowance, so it should be transferred into tenants in common and 2 x Life Interest Trusts set up within the Wills for both spouses to qualify.

The only situation where this wouldn’t be necessary is if the first spouse dies before April 2017. So if the husband above dies before April 2017 while the house was in his wife’s sole name, he would still qualify for the allowance.

What if we don’t own a house?

We have cash of £2m and do not own a house. What is our total allowance?

If you do not own a home, the additional allowance is unavailable and the maximum nil-rate band you are entitled to is £325,000 per individual, or £650,000 for a couple.

Our home will be sold on death. Will we miss out?

I have been married to my second wife for 25 years. We are both in our late eighties. I have one son and my wife has no children. We own our property jointly.

In our wills, we sell everything including our property and distribute the proceeds to our beneficiaries. Does this mean that we will not benefit from the new allowance?

The family home allowance is available only when a property is directly passed to children or grandchildren. However, if a property is sold after July 8 2015, the new allowance will be available as long as an equivalent value is passed to children or grandchildren and as long as at least one partner is still alive when the new allowance comes in. Anyone who sold or downsized before July 8 2015 will not benefit.

I’m already widowed. What’s my new allowance?

I am a widower – my wife died four years ago. While my current allowance is £650,000, what additional allowance will be available? Is it as a single person at £175,000 or will my wife’s allowance also be applied, up to the maximum of £1m in 2020?

Where the first spouse dies before April 2017, all of their family home allowance can be transferred (provided the estate of the first spouse did not exceed £2m). In this case, if you were to die in 2020-21 when the family home allowance is £175,000, you would also be entitled to your wife’s £175,000 allowance.

Thy Will Be Done’s advice over the past few years proves to be invaluable yet again.

The way forwards is:

Making you and your partner tenants in common and then immediately conveying both halves into Property Probate Trusts to be 100% assured of maximum protection during life and maximum allowance upon death or placing Protective Property Life Interest Trusts within your Will to be 100% assured of maximum protection and maximum allowance upon death.