Family homes of up to £1m to avoid Inheritance Tax under planned Tory changes
The recent election result surprised many people, not least the pollsters. With many predicting a further five years of coalition or minority government, the Conservative majority (albeit a very slim one) shocked the country on the morning of 8th May.
During the election build up, there were clear dividing lines between the major parties when it came to wealth and property – Labour and the Liberal Democrats planned to tax the wealthier and introduce the Mansion Tax on properties worth more than £2m, whereas the Conservatives aimed to protect family wealth and promised to increase the Inheritance Tax (IHT) threshold specifically to shelter the family home from the taxman.
Now the election dust has settled, the Conservatives have made it clear that they plan to deliver on all their manifesto promises, including the promise to remove family homes worth up to £1m from IHT in what Chancellor George Osborne said “supports the basic human instinct to provide for your children”.
The current IHT threshold of £325,000 has been frozen since 2009 and will remain so until 2018. This “Nil Rate Band” is transferable between married couples and civil partners, doubling the threshold to £650,000. Considered by many to be a “stealth tax”, this freezing of the IHT threshold has had the effect of dragging tens of thousands of families into the IHT net, and it remains a very polarising tax politically.
The Conservatives had pledged to introduce a £1m IHT threshold back in 2007, before the economic crisis hit and government budget priorities changed. David Cameron vowed to introduce the £1m threshold again before the 2010 election, only to find this blocked by their Liberal Democrat coalition partners. Now with a majority, the Conservatives are planning to introduce this £1m exemption from April 2017.
So how is it expected to work?
The £325,000 threshold will remain intact, with a new dedicated tax free allowance (the “family home allowance”) introduced specifically to protect the family home from IHT. This secondary allowance will be worth £175,000 per person and will come on top of the £325,000 threshold, meaning that individuals who die and pass on assets, including the family home, can leave up to £500,000 to children and grandchildren and face no IHT charges.
As with the £325,000 threshold, this new allowance will be transferable between married couples and civil partners so the total value of assets that can pass on tax-free will rise from £650,000 to £1m. Parents with an estate worth £1m including the family home will see their current IHT exposure of £140,000 eliminated after April 2017.
The allowance will gradually taper away for estates worth more than £2m and estates worth more than £2.35m will lose all of it. So the more valuable estates will not benefit from these reforms. In an era of austerity and planned deficit cuts, the books of course must be balanced and this reform will apparently be paid for by reducing the tax relief on pension contributions for those on incomes over £150,000.
Yet for all the headlines and political bluster, IHT still only remains an issue for wealthier families and the majority of the population will not have to worry about it. Currently only 6 per cent of estates are liable for IHT and this is forecast to rise to 12 per cent by 2019. The Conservatives claim this reform will reverse this anticipated rise and keep the level at 6 per cent.
Critics claim that the government should focus its priorities helping the less wealthy in society. Independent economists have questioned the “rather odd” special treatment for homeowners, claiming this reform would “disproportionately” benefit richer families and drive up property prices. But this has been a long-held promise for the Conservatives and now that they have their parliamentary majority, they plan to deliver it.
Richard Whitelock is a Senior Tax Consultant at Garbutt & Elliott and a Chartered Tax Adviser, specialising in personal and employment taxation matters.