Long-awaited changes to Inheritance Tax (IHT) rules are set to take effect from April 6th, 2017.
The alterations will introduce – the residence nil-rate-band which will give an extra allowance of £100,000 to each individual, on top of the £325,000 tax-free allowance already available provided an individual’s estate includes a gift of their home to their children.
The reforms will also enable the allowance to be transferred for those who are married or in a civil partnership and potentially push up the total tax free allowance to £850,000.
That said, the allowance will only apply to assets passed on to children and grandchildren, with other relatives such as siblings unable to qualify.
It should also be noted that there will be a “tapered withdrawal” of the additional residence nil-rate band for estates worth in excess of £2million. Some experts have suggested that the mechanism for calculating an estate’s liability in these circumstances will be extremely complicated.
The changes to IHT were announced by the previous Chancellor George Osborne and seen as a direct response to criticism about the increasing number of people who are being dragged over the tax threshold by rising property prices.
Next month’s change will be the first of several staggered over the next few years, with the ultimate goal that the total tax-free allowance for home owners will have reached £500,000 for individuals and £1million for couples by 2020.
Mr Osborne’s successor, Philip Hammond, is still under pressure to make further changes to the system, with the latest call to raise the annual threshold for gifts – which has not been adjusted to take account of inflation.