Out-Law News | 08 Jul 2015 | 5:36 pm | 1 min. read
The change had been previously mentioned in an article last week for The Times newspaper by prime minister David Cameron and George Osborne. However, the Budget documents provide more detail of the proposed change.
Inheritance tax (IHT) is charged at a rate of 40% on death on the chargeable value of an estate, above the nil-rate band, after taking into account the value of any chargeable lifetime transfers. The current inheritance tax exemption of £325,000 has been frozen since 2010-11 and the chancellor said that this will continue to remain frozen until at least 2020.
The chancellor announced that the government will add an additional 'main residence' nil-rate band to the existing £325,000 tax free allowance from 6 April 2017. The allowance will start at £100,000 but will increase by £25,000 each year until it reaches £175,000 in April 2020, following which point it will increase in line with inflation.
This means that from April 2020 individuals will be able to pass on assets worth up to £500,000, including an interest worth more than £175,000 in a home, without paying any IHT at all. For married couples, the allowance is combined making the total £1 million.
The relief only applies when passing a main residence to direct linear descendants and the availability of the relief will reduce for people who leave more than £2 million behind upon death. A direct descendant will be a child, including a stepchild, adopted child or foster child, of the deceased and their lineal descendants.
Under the proposals anyone who wants to downsize to a smaller property will be eligible for an inheritance tax credit so that even if they sell an expensive property they will still qualify for the new threshold.
A qualifying residential interest will be limited to one residential property but personal representatives will be able to nominate which residential property should qualify if there is more than one in the estate. A property which was never a residence of the deceased, such as a buy-to-let property, will not qualify.
The chancellor also announced changes to how inheritance tax applies to non-domiciled individuals holding UK property. All UK residential property held directly or indirectly by non-doms will be brought into charge for inheritance tax purposes, even when the property is owned through an indirect structure such as an offshore company or partnership. In wide ranging changes to non-dom status, he also announced that the status will be removed for individuals who have been resident in the UK for 15 out of the last 20 years.