2017 IHT Rule Changes

by on 22·12·2015

The Chancellor George Osbourne announced some long overdue changes to IHT in his Emergency Budget on 8th July after the recent election.

The changes mean that the total inheritance tax (IHT) threshold for those who own a family home will increase from 6th April 2017 until it reaches £500,000 by 2020. This means that married couples and civil partners will be able to pass on assets worth up to £1m, including a family home, completely free of Inheritance Tax from April 2020.

In practice, the rules propose the introduction of a 'family home allowance' set initially at £100,000 in April 2017 and then rising by £25k per annum until it reaches the maximum of £175,000 by 2020.

This 'family home allowance' is per person (must be a homeowner otherwise the allowance is not available) and will be added to the current IHT threshold of £325,000 each.

In theory, a person will be able to distribute assets of up to £500,000 as long as their main residence forms part of this and the property must be immediately inherited by the deceased's children (range includes stepchildren, adopted and foster children) or grandchildren.

The deceased's spouse can still inherit any unused IHT allowance meaning that they can pass on up to £1 million free of Inheritance Tax. 

As a restriction on the new rules, the new 'family home allowance' will be gradually withdrawn for estates valued in excess of £2 million at the rate of £1 for every £2 over the £2 million limit.

Anyone who wants to downsize to a smaller property to circumvent the £2 million limit 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 providing the bulk of the estate is left to their direct descendants.
 
This is an attempt by the Government to encourage pensioners to free up larger properties for growing families.

The benefits of the new rules will commence from 6th April 2017 when the transferrable nil rate band total will effectively rise from £650,000 up to £850,000 with the addition of the 'family home allowance' of £100,000 for each individual (i.e. £200,000 per married/civil partnership couple).  The 'family home allowance' will continue to rise by £25k each per annum in 2018, 2019 and ultimately reach £175k each in 2020.

The table below illustrates some of the possible scenarios that may arise from 2020: 

The threshold for losing all of the 'family home allowance' is and estate valued at £2.7 million as detailed in the above table.