The £1 million inheritance tax (IHT) allowance made a good headline but there is confusion about who exactly will benefit.
Chancellor George Osborne used the summer Budget to lay out plans for a £1 million IHT allowance that will allow family homes to be passed on tax free.
However, tax advisers are reporting confusion about when and how they will benefit, with many people believing that it comes in straight away and that every person now has a £1 million allowance.
In truth, the £1 million will only come into force in 2020/21 and will only apply to married couples or those in civil partnerships.
Currently the nil-rate-band on which you do not pay 40% IHT is £325,000 per person or £650,000 for a couple. From 2017/18 an additional main residence threshold of £100,000 will be introduced meaning a property of £850,000 can be passed on by a couple to their children or grandchildren tax free. The additional threshold will rise to £125,000 in 2018/19, to £150,000 in 2019/20 and to £175,000 in 2020/21 – taking the allowance to £1 million total.
In order to take advantage of the additional band, spouses and civil partners must be sure to leave their half of the estate entirely to their spouse, otherwise the survivor can only use their only nil rate band and additional band.
Those who make generous gifts before death could also erode their nil rate band, and the £1 million total available to them. And it's not just the house that needs to be taken into consideration – if you have assets of over £2 million in total, including the house, your additional band will be tapered back.
And those without a spouse or children will lose out drastically. If you don't have 'lineal descendants' to leave your property to, such as children or grandchildren, you lose the extra allowance - you can't use the additional threshold to pass your estate to a niece or nephew.
Passing on a £1 million home was a political win for the Conservatives but there are plenty of hurdles they have put in the way. A simpler solution would have been to link the £325,000 band to inflation in 2010 when the party came to power as it would be near the £500,000 per person mark today.
This would have been a much fairer and simpler way to allow people to pass on their estate to whomever they choose.
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