The Government's proposals for a £1 million IHT allowance
In their manifesto, the Conservative party announced that they would allow family homes, worth up to £1 million, to be passed on free of inheritance tax ("IHT") on death. We are presently awaiting an announcement on the details and timing of these proposals and hope to hear further in the second Budget of the year on 8 July 2015.
In the meantime, each individual already has an IHT free amount which they can leave on their death called a 'nil rate band'. The nil rate band has been frozen at £325,000 since 2009. However, it is transferable between spouses and civil partners ("spouse" hereafter refers to either), meaning spouses can leave up to £650,000 of their combined estate to their children free of IHT on the second death.
The Conservatives' proposals are for an additional IHT-free amount which attaches to the family home (a "main residence allowance") of £175,000 per spouse which is again transferable, so a surviving spouse will be entitled to a £650,000 nil-rate band and a £350,000 "main residence allowance", giving a tax free amount of £1 million in total.
The proposals mean that, in theory, if the only asset of your combined estates on the second death is the family home worth up to £1 million then there will be no IHT to pay. However, in practice, there will be other assets in an estate so if your family home is worth £1 million and there are, say, £1 million of cash and other investments, you will not be able to leave your home to your children free of IHT. Furthermore, we understand that the "main residence allowance" will be gradually reduced on properties worth more than £2 million and will not apply at all to homes worth more than £2.35 million.
We will be tracking these proposals but at present, pending any announcement, if your home and other assets exceed £325,000, there could be IHT at death, so having an IHT-efficient Will is important.
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