In the 2015 UK summer budget Chancellor George Osborne introduced his “family home allowance”, increasing the inheritance tax threshold to a potential £1m. The new allowance can apply to property outside the UK if you meet certain conditions.
In the 2015 UK summer budget Chancellor George Osborne introduced his “family home allowance”, increasing the inheritance tax threshold to a potential £1m. Inheritance tax is considered one of the most unfair taxes in the UK. Many people resent the government taking the hard-earned money they want to leave to loved ones – money they have already paid tax on. So the fact that most family homes will now be exempt from the tax is welcome.
It is good news even if you live outside the UK, as the new allowance can apply to property outside the UK, if you meet certain conditions.
What the changes mean
Currently, inheritance tax is fixed at 40%, with a tax-free threshold (the ‘nil rate band’) of £325,000. When this threshold is not used, or only partly used, you can transfer the balance to your spouse or civil partner. So the threshold for a couple or surviving spouse can be as high as £650,000.
The £325,000 nil rate band will remain in place, and is frozen until the end of the 2020/2021 tax year. The new family home allowance of £175,000 will be added to this gradually from April 2017:
- £100,000 in 2017/18
- £125,000 in 2018/19
- £150,000 in 2019/20
- £175,000 in 2020/21.
From 2021 onwards the allowance will increase in line with the consumer price index.
You will be able to transfer the allowance to a spouse or civil partner in line with existing principles, which makes a total potential threshold for a couple of £1m by 2020.
Expatriates and the new allowance
If you are UK domiciled, you are liable for inheritance tax on your worldwide assets – liability does not depend on residence. Domicile law is complex. You can live in another country for many years and remain a UK domicile. The basic rule is that you are domiciled in the country where your life is centred, and which you regard as your homeland.
If you have a worldwide estate, you need to take professional advice to establish your domicile status, how UK inheritance tax interacts with any local inheritance/succession tax and what steps you can take to avoid these taxes for your heirs.
You can claim the new additional £175,000 allowance on overseas property, provided it is your main home. Local succession tax may still apply.
Limitations on the allowance
The family home allowance only applies to a property that is left to children and grandchildren, and which the deceased has lived in ‘at some stage’.
If there is more than one property in your estate, only one will qualify for the allowance. Also, it only applies to property, not to assets outside of the family home.
Once your estate is worth over £2m, the new allowance starts to taper off, £1 for every £2, until you do not benefit at all. Bear in mind that if you cash in your pension under the new UK pension freedom, it will increase the value of your estate.
Downsizing rules are still being finalised, but HM Revenue & Customs states that if you sold or downsized on or after 8th July 2015, you can get the new allowance, subject to certain conditions. For example, you can claim it as long as the equity released from the downsizing, alongside the property, is left to your children.
You will also need to prove you have downsized so there is no confusion about when the property was sold and any cash held in the estate – the rules will be quite specific about what counts as downsizing.
If you have set up a ‘discretionary trust’ so you can leave property to children in a tax-efficient manner, you should review your estate planning to make sure you do not miss out on the new allowance. This is because the property would not be left directly to descendants, and so would not be eligible.
Other trusts, such as interest in possession (IIP) and immediate post death interest (IPDI) trusts, do qualify because property is deemed to pass directly to the beneficiaries.
If you live abroad, local laws will affect how your trusts are taxed. You should speak to a specialist who understands international tax laws and how they can affect your inheritance.
So the new allowance is good news, but there are issues to consider and plan for, and the government still needs to finalise everything. Meanwhile, there are steps you can take to reduce or avoid inheritance tax for your heirs. You should take personalised and specialist advice on your estate planning that considers both the UK and regime and that of your country of residence.
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18 November 2015
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices, which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.