There was good news in the first full Conservative budget for nearly 20 years this month – the threshold for inheritance tax on homes will be raised to £1 million which means that less of the assets you leave to loved ones will be going to HMRC.
As far as taxes go, inheritance tax is undoubtedly the most unpopular as many people see it as a further deduction of money they have already paid dues on. It’s estimated that in the first three months of this year, nearly £1 billion in inheritance tax payments was collected by the tax man. The raising of the threshold to £1 million may seem a generous offering from George Osborne but, as with most financial matters, things are not quite as simple as they seem.
Inheritance tax is paid on any amount over a certain threshold. Prior to Osborne’s budget announcement this was, and still is for the moment, £325,000. Above the threshold you are currently liable to pay 40% in tax. That means that someone who collects just £100,000 over the threshold would have to pay £40,000 in tax.
It applies to the amount a person’s estate is worth which includes property, possessions and money but if you are a couple you can combine your allowances and benefit from a threshold of £650,000.
In truth, the threshold for inheritance tax has been frozen since 2009 and the main complaint has been that it hasn’t kept up with the rise in asset value, particularly property. With an average price of over £450,000 for a flat in Central London, you might be forgiven for thinking that boosting the threshold up to £1 million will save a lot of people money when it comes time to pass on assets.
The trouble is that it only applies to couples who have a property worth less than £1 million and which they are passing onto their children, for all others the threshold will be half this amount. The policy change was announced by both Osborne and Cameron in a joint article in the Times which stated: “It can only be right that when you’ve worked hard to own your own home, it will go to your family and not the taxman.”
The plan is to gradually add a further £175,000 to the allowance for everyone though this will not begin until 2017 and won’t be introduced fully until 2020. That will take the threshold up to £500,000 for everyone and £1 million for couples.
The amount at which inheritance tax can be levied will remain frozen for quite some while after 2020. This has led some industry observers to comment that once again house prices will far outstrip the benefits of the higher threshold and in a relatively short time, especially in areas such as London. Those who don’t have their wealth tied up in the family property will not benefit from the changes and there may be future effects on other inheritance tax reliefs to make up for the shortfall of income going to HMRC.