A new Inheritance Tax threshold was announced yesterday by the Chancellor, George Osborne, when he delivered his first budget since the election.
From 2017, an additional nil rate band will be introduced when a main residence is made over to direct descendants on death. Homes worth up to £850,000 can be passed to your children on death without paying Inheritance Tax, rising to £1 million by 2020. This means that each parent will be able to leave £500,000 in heritable residential main residence property without paying Inheritance Tax. As allowances can be transferred between spouses or civil partners, on second death, the surviving spouse may have a £1 million allowance by 2020.
Currently, the Inheritance Tax threshold is £325,000. When someone dies, their estate pays Inheritance Tax at a rate of 40% on the value of the estate above this threshold. The threshold of £325,000 will remain unchanged, however, in essence, a new tax free band of £175,000 per person is effectively being added to the £325,000 threshold in respect of your main residence, which increases the allowance to £500,000 per person where there is a property involved.
The additional threshold will be introduced gradually. There will be an increase of £100,000 in 2017-18, £125,000 in 2018-19 and £175,000 in 2020-21, with any unused nil rate band transferring to a surviving spouse or civil partner.
The additional threshold will also be available where a person downsizes or ceases to own a home after 8 July 2015, where that money once formed part of the equity in a property and assets of an equivalent value, up to the value of the additional nil rate band, are passed on death to direct descendants.
For those owning properties with a value over £2 million, for every £2 of value over £2 million, £1 will be deducted from the new main residence threshold from 2017. Therefore, those home owners will not receive the same level of tax break.
A summary of some other important changes are as follows:-
- The income tax personal allowance rises from £10,600 in 2015/16 to £11,000 in 2016/17. The higher rate tax threshold will increase from £42,385 in 2015/16 to £43,000 in 2016/17.
- The dividend tax credit will be replaced by a new £5,000 tax-free dividend allowance for all taxpayers from April 2016. Tax rates on dividend income will be increased for income above the allowance, which will be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
- Legislation will be introduced from April 2017 to ensure that anybody resident in the UK for more than 15 of the past 20 years will be deemed to be domiciled in the UK for tax purposes.
- From April 2017, any individual who is born in the UK to parents who are domiciled here will not be eligible to claim non-domicile status while they are resident in the UK.
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The information and opinions contained in this blog are for information only. They are not intended to constitute advice and should not be relied upon or considered as a replacement for advice. Before acting on any of the information contained in this blog, please seek specific advice from Gilson Gray.