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Budget 2015: Property Inheritance tax changes confirmed

The chancellor George Osborne has confirmed a new £1m inheritance tax allowance for couples who want to pass on the family home to children and grandchildren.

The news means that if you own a property with a value of up to £1m you can leave it to your children or grandchildren and pay no inheritance tax at all once the new rules come into force from April 2017.

The move comes as thousands of home owners have been dragged into the current inheritance tax bracket after the value of properties have risen across the UK and especially in the south east and London.

This value of the family home has given cause for concern for a large percentage of homeowners worried about how much tax will be applied to their estate after death.

Mr Osborne said on the changes:

“Inheritance tax was designed to be paid by the very rich, yet today there are more families pulled into the inheritance tax net than ever before - and the number is set to double over the next five years. It's not fair and we will act.

The new threshold, so that people can pass on estates worth up to £1m free of inheritance tax, will not apply to estates worth more than £2m.

Tax paid only by the rich. The security of home ownership restored. Promise made, promise delivered.”

Mr Osbourne believes that the move will be popular with the public because it taps in to the natural aspiration to leave behind something for your descendants.

The new rules will replace the current Inheritance Tax rates which give a tax free allowance of £325,000 per person. This means married couples or civil partners can currently pass over assets worth up to £650,000 before Inheritance Tax is charged.

 

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Any figure left in the estate above that amount is taxed at a rate of 40%. These figures have been frozen since 2009 not taking into account the increase in property values.

The new threshold will add an additional £175,000 tax free allowance per person in the form of a Family Home Allowance. Once this is added to the existing allowance of £325,000 each person can pass on assets worth up to £500,000 tax free, while couples and civil partnerships can pass on up to £1m between them.

Couples who are approaching retirement or who are 'empty nesters' after the children have left home can downsize to a smaller home and still be eligible for an inheritance tax credit. This will mean that if they sell an expensive property before their death they will still be able to take advantage of the new Inheritance Tax thresholds when their estate is left to their children.

The inheritance tax cut will be paid for by a change in tax relief on pensions. From next year the pension tax relief allowance for the highest earners will be reduced.

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