UK Inheritance Tax Reform

09.07.15

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The UK government has confirmed plans to remove most family homes from the inheritance tax net.


Inheritance tax is considered the most unfair tax imposed in the UK.  Any changes to reduce the burden for families are welcome, and the government has now confirmed that it will go ahead with plans to remove most family homes from the tax net.

British expatriates continue to be affected by UK inheritance tax since is based on domicile rather than residence.

The UK currently charges one of the highest effective inheritance tax rates in the world – three times the global average under some estimates.

Current inheritance tax rules

The rate of tax is fixed at 40%, with a tax free threshold (the “nil rate band”) of £325,000 per individual. It used to increase every year but has been frozen since 2009.

Where this threshold is not used on the first death, or only part of it used, the balance can be transferred to a spouse or civil partner. So the threshold for the surviving spouse can be as high as £650,000.

New rules – exempting the family home

As part of its election manifesto, the Conservative Party pledged to increase the threshold to £1 million where a family home is involved.

Chancellor George Osborne has now confirmed this in his budget of 8th July, where he introduced a new “family home allowance” of £175,000. This will apply for transfers on death from 6th April 2017.

He said that a large number of people will be better off, and “hard working people will finally see the fruits of their labour passed onto their children and grandchildren, and not into the taxman’s pocket”.

This new allowance will work as follows –

The standard £325,000 nil rate band remains in place and will be held at this level until the end of the2020/21 tax year.  

From April 2017 individuals will receive a further nil rate band for the main home, in certain circumstances.  

It will be introduced gradually, so that it is £100,000 in 2017/18; £125,000 in 2018/19; £150,000 in 2019/20 and £175,000 in 2020/21.

This additional allowance will also be transferable to the surviving spouse/civil partner if not used on the first death, in line with existing principles. This makes a total potential threshold for a couple of £1 million by 2020.

From 2021 onwards it will increase in line with the consumer price index (CPI).

The full amount will be transferable even if one spouse died before the policy came into effect.

This new allowance will only apply to a property which is left to children or grandchildren on death, and which the individual has used as a residence at some point.

So if you leave the property to anyone else the threshold remains £325,000. Wealth outside the family home does not benefit either.

The new allowance will only apply to properties worth up to £2 million. It will then be tapered away by £1 for every £2 that the net value exceeds that amount.

This extra exemption will apply to a property outside the UK that is the main home of UK domiciles. Local succession tax may still apply, however, in countries like Spain and France.

This reform is very welcome. Asset prices, particularly property, have been rising and more and more families are getting caught in the inheritance tax net.

HM Revenue & Customs collected £397 million in inheritance tax receipts this April. This is the largest amount ever for a single month – the average over the last 10 years was £260 million. It collected £1 billion for the three month period to end May, the highest three-month amount since 2007.

The total raised for the 2013/14 tax year was £3.4 billion. This is forecast to increase to £4.2 billion for this tax year, and reach £6.4 billion by 2020 if it remained unchanged.

One of the arguments against inheritance tax is that it is unfair because you are taxed twice – when you earn the money in the first place, and then when you die. However, there are many steps you can take to reduce or avoid this tax for your heirs. Your family’s situation is unique, and you should take personalised and specialist advice on what estate planning methods would be most effective and suitable for you. This should consider both UK and the tax regime in your country of residence, and the interaction between them.

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.

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; individuals should seek personalised advice.

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