In short, it will soon be possible to leave the value of a family home worth up to £1m free of inheritance tax.
This becomes possible because, from April 2017 onwards, the inheritance tax nil rate band is increased from its current level of £325,000 to a new effective level of £500,000 which will be reached in 2020/21.
Married couples and civil partners can then, as a result, leave a family home valued up to £1m to their children or grandchildren (direct descendents) entirely free of inheritance tax.
There is some small print to consider.
The ‘family home allowance’ of £175,000 per person will be added to the existing nil rate band of £325,000 in gradual steps from April 2017 onwards.
It will be £100,000 in 2017/18, £125,000 in 2018/19, £150,000 in 2019/20 and £175,000 in 2020/21.
From 2021/22 onwards, the family home allowance will increase in line with price inflation, as measured by the Consumer Prices Index (CPI).
That existing nil rate band of £325,000 is due to be fixed until the 2020/21 tax year, and it will be possible to transfer both unused allowances to your surviving spouse or civil partner.
For people dying with a home valued at £2m, this family home allowance will be gradually withdrawn.
It will be withdrawn by way of a tapered withdrawal of the additional nil-rate band, at a rate of £1 for every £2 over a threshold of net estates valued at £2m.
If you currently own an expensive property and want to downsize in later life, that’s OK.
People who downsize will receive an ‘inheritance tax credit’, in a move designed to encourage older people to free up larger properties for growing families.
This inheritance tax credit system is available already, coming into force from the date of the Budget on 8th July 2015.
All of this is being funded with a lower annual allowance on pension contributions for higher earners.
Those earning £150,000 or more a year will see their pension annual allowance reduced from £40,000 down to £10,000 a year, with effect from April 2016.
If you have any questions about these changes to inheritance tax and what they mean for your Financial Planning, please do get in touch.