Inheritance tax (IHT) planning is an essential part of transferring an estate to a spouse or civil partner.
IHT is charged at 40% on any estate valued above the £325,000 threshold. A person looking to pass on an estate will be liable to pay IHT as long as their estate is above the tax threshold until 2020/21.
However, an additional nil-rate band of £100,000 is set to be introduced when a main residence is passed on upon death to direct descendants (children or grandchildren). This additional nil-rate band is being called the ‘family home allowance’.
So how can the family home allowance be used to reduce the amount of IHT paid on your estate?
Family home allowance
A transferable additional nil-rate band will come into force from 6 April 2017 for people passing on their main home or estate to a direct descendent.
The nil-rate band will start at £100,000 per person and will increase by £25,000 each year over a 5 year period to £175,000:
- £100,000 in 2017/18
- £125,000 in 2018/19
- £150,000 in 2019/20
- £175,000 in 2020/21.
For estates with a net value of more than £2 million, there will be a tapered withdrawal of the additional nil-rate band at a rate of £1 for every £2 over this threshold.
The existing IHT threshold of £325,000 will remain from 2018/19 until the end of 2020/21.
Who will benefit?
The new band will effectively take the threshold at which IHT threshold is payable to £500,000 for family beneficiaries.
Married partners will be able to claim any unused allowance from a deceased spouse, so effectively a couple with a home will get a doubling of the combined exemption between them.
This will rise each year by £50,000 over 5 years:
- £850,000 in 2017/18
- £900,000 in 2018/19
- £950,000 in 2019/20
- £1 million in 2020/21.
7 year rule
If you or your partner dies within 7 years of passing on all or part of your property, your home will be treated as a gift and applied by the 7 year rule.
No IHT is paid on gifts between spouses and civil partners but other gifts will count towards the value of your estate and will be liable for IHT if you die within 7 years.
| Years between gift and death | Tax rate |
| Less than 3 | 40% |
| 3 to 4 | 32% |
| 4 to 5 | 24% |
| 5 to 6 | 16% |
| 6 to 7 | 8% |
| 7 or more | 0% |
You can estimate your liability with our inheritance tax calculator.
Contact us
If there is a specific area you would like us to discuss with inheritance tax planning, contact us by completing the form on our website.
Alternatively you can call us on 020 8977 0905 (Hampton Wick Office) or 01932 855644 (Weybridge Office) to speak to an adviser.
