One of the surprises in the Conservative manifesto was the proposal to create a new transferable main residence band of £175,000 per person for inheritance tax (IHT). The idea was criticised by many, including the Institute for Fiscal Studies which said “it would have been much simpler and arguably fairer” to just increase the nil rate band to £500,000. In a leaked paper published by The Guardian, even the Treasury, said that “there are not strong economic arguments for introducing an inheritance tax exemption specifically related to main residences”.
Nevertheless the Chancellor has gone ahead with the plan, but it is rather more complicated than the manifesto suggested:
- The initial band will be £100,000 in 2017/18, rising by £25,000 a year until it reaches £175,000 in 2020/21. It will then increase in line with CPI from 2021/22 onwards.
- The band will generally only apply to gifts of main residences (not second homes) to direct descendants.
- The transferability is only between spouses and civil partners – as applies to the existing nil rate band.
- A taper will apply to the allowance for estates valued at over £2m: the allowance will drop by £1 for each £2 over this threshold.
- There will be special provisions for those who downsize or cease to own a home on or after 8 July 2015.
- The legislation introducing the new band will extend the current IHT nil rate band freeze until the end of 2020/21.
The leaked Treasury paper estimated that the measure would still leave 6% of estates liable to IHT by 2020, so you cannot forget the tax completely. To discuss what impact the measures will have on your long term estate planning and what actions you should consider, please contact us.