The main residence inheritance tax allowance has by risen £25,000, reducing the death duty burden for thousands of families.
The allowance was introduced in April last year and was set at £100,000. In April this year it rose to £125,000 and will rise to £175,000 by 2020.
It only applies to a person’s home, not the rest of their estate.
When added to the £325,000 nil-rate band for inheritance tax, it currently provides a combined tax-free band of £450,000. This will rise to £500,000 by 2020.
Married couples can combine their allowances. When one partner dies, their share of the estate is passed on to their spouse free of any inheritance tax.
This means that by 2020, a married couple could have a combined allowance of £1m.
However, the allowance is only available when the property is left to “direct descendants”. It doesn’t apply to trusts.
Meanwhile, the Office of Tax Simplification is carrying out a review of inheritance tax thresholds to bring them up to date. For example, the maximum sum that can be gifted tax free has been frozen at £3,000 a year since 1981, when it would have been enough for a deposit on an average home.
It’s estimated that bringing this and other tax benefits in line with modern day prices could benefit up to three million people a year.
Please contact us if you would like more information about the issues raised in this article or any aspect of wills, trusts and inheritance planning.