Inheritance tax changes to the family home
QUESTION: My motivation is to build up assets with the aim of passing them on to my children and my grandchildren without needing to worry about inheritance tax. I heard that there is an increased nil-rate band when my family home is passed on to my children on my death. What is the impact of these changes?
Answer: Currently, Inheritance Tax (IHT) is charged at a rate of 40 per cent on death on the chargeable value of an estate, above the nil-rate band, after taking into account the value of any chargeable lifetime transfers made during the person’s life. The current inheritance tax exemption of £325,000 per person has been frozen since 2010-11 and the chancellor said that this will continue to remain frozen until at least 2021.
The chancellor also announced that the government will add an additional 'main residence' nil-rate band to the existing £325,000 tax free allowance from April 6 2017. The allowance will start at £100,000 but will increase by £25,000 each year until it reaches £175,000 in April 2020, following which point it will increase in line with inflation.
This means that from April 2020 individuals will be able to pass on assets worth up to £500,000, including an interest worth more than £175,000 in a home, without paying any IHT at all. For married couples, the allowance is combined making the total £1 million by April 2020.
The relief only applies when passing a main residence to direct linear descendants and the availability of the relief will reduce for people who leave more than £2 million behind upon death. This will be at a withdrawal rate of £1 for every £2 over the threshold. A direct descendant will be a child, including a stepchild, adopted child or foster child, of the deceased and their lineal descendants.
However, there have been calls for the government to rethink this policy that will see the estates of childless people excluded from a cut in IHT.
Also, under the chancellor’s proposals anyone who wants to downsize to a smaller property or cease to own a home after July 8 2015 will be eligible for an inheritance tax credit so that even if they sell an expensive property they will still qualify for the new threshold. However, the details of this will be subject to a technical consultation.
A qualifying residential interest will be limited to one residential property but personal representatives will be able to nominate which residential property should qualify if there is more than one in the estate. A property which was never a residence of the deceased, such as a buy-to-let property, will not qualify.
The chancellor also announced changes to how inheritance tax applies to non-domiciled individuals holding UK property. All UK residential property held directly or indirectly by non-doms will be brought into charge for inheritance tax purposes, even when the property is owned through an indirect structure such as an offshore company or partnership. In wide ranging changes to non-dom status, he also announced that the status will be removed for individuals who have been resident in the UK for 15 out of the last 20 years.
:: Feargal McCormack (f.mccormack@ pkffpm.com) is managing partner of PKF-FPM (www.pkffpm. com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.