Last Updated on 6.7.16 by Michael Smoult
The second budget of the year has just been announced, but unlike the one earlier in the year, this is the first all-Conservative budget in nearly two decades. Within it, included a change to the inheritance tax rule aimed at family homes.
Inheritance tax, as the name states, is the tax levied on property and money acquired as a gift or inheritance. The change, as outlined by George Osborne, will now allow a couple to pass down a house worth up to £1 million to their children or grandchildren without being taxed for the privilege.
The previous tax-free allowance was £325,000 a person (£650,000 per couple), which could be applied to all assets; but the chancellor has declared that he will increase this by £175,000 a person, meaning the total household threshold equals a round £1 million figure. This new larger total means that 94% of households would be exempt from the tax and owners of homes worth more than £1m would pay less. For example a house worth £2m would have a £140,000 tax cut.
The plans for this new inheritance tax legislation was a key pillar of the Conservative manifesto and is obviously high on Mr Osborne’s priority list, eight years after he promised to raise the allowance when he was the shadow chancellor to the Labour government. Despite the chancellor’s urgency in announcing, the extra tax-relief is not expected to come into effect until the 2017-18 tax year.
This new inheritance tax policy is to be funded by imposing higher taxes on pension contributions where an individual earns more than £150,000 per year.
Whereas Tories are spinning this as part of the “Conservative Dream”, opposition see it as tax-relief for the millionaires and owner-occupied housing which is already very privileged in the tax payments. We think that it will encourage even more people to put their money into a house, potentially inflating the housing market. However, this won’t deal with the lack of houses, which is causing prices to increase.
One criticism of the rule change was that older homeowners would be reluctant to sell their property and downsize as they may loss the additional tax relief. This would undoubtedly congest the market further, however, the government appear likely to include a safeguard to protect people in this situation.
Act On It
With heirs to your estate likely to benefit from this tax relief, it will be more important than ever to ensure your property and assets are being passed down into the right hands of the people of your choosing.
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Partner & Head of Wills, Trusts & Probate, Wills, Trusts & Probate