The Changes to Inheritance Tax Rules And Thresholds



Posted on: 26th October 2015

So it wasn’t all doom and gloom from Chancellor George Osborne when the subject of inheritance tax hit the headlines earlier this year…at least for those with properties of something of a more ‘moderate’ market value. As of this year’s budget, it was announced that the inheritance tax (IHT) threshold would be raised significantly from the existing £325,000 per person to a new upper- limit of £500,000. Or in other words, if you’re in possession of a property worth no more than £1 million and would like to pass it on either to your kids or to their kids, as of April 2020 you’ll be able to do so without anyone having to pay a penny in inheritance tax.

The change in the upcoming inheritance tax legislation applies to civil partners and married couples alike, who will be entitled to a combined total tax-free property assets limit of £1 million which will not be liable to the usual/current taxation.

Realistically, it was an inevitable change and one that needed to be set in stone sooner rather than later. The reason being that over recent years, an incalculable number of homeowners up and down the United Kingdom have experienced extraordinary increases in the values of their properties – particularly those concentrated around the more explosive property markets of London and the South East. Unsurprisingly, such increases in property values have led to widespread concern with regard to exactly how much their respective owners would have been liable to lose in taxation were the properties to be left to family members after their death.

Now Vs Then

As the system currently stands, and has stood since 2009, a standard rate of 40% taxation applies on estate assets passed on that exceed £325,000 per person – or £650,000 per couple. This therefore means that at present, any couple passing on an estate to any members of their family can do so to an upper limit £650,000 per couple before being liable for any taxation.

But this is all set to change going forward as beginning April 6 2017, a new “family home allowance” will be added to this upper limit which over the course of the years to follow will eventually be worth £175,000 per person. It will increase £100,000 for the 2017/2018 year, £150,000 for 2019/20 and ultimately £175,000 per person as of 2020/2021.

Things aren’t however quite the same at the other end of the scale as for those looking to pass on properties and assets totaling more than £2 million in value, additional benefits are to be withdrawn gradually. As far as the government is concerned, the move represents a clear illustration of prior promises to make life for low to medium and earnings households more affordable with an increase in taxation policies that more fairly target those in the very highest income brackets.

How You’ll Be Affected

In order to illustrate the changes and how you personally may be affected with accordance with how much your estate is worth, Hargreaves Lansdown published a series of simple calculations and examples which are as follows:

For a Single Person:

Value of family home Value of other assets Value of the estate IHT liability now IHT liability from April 2020
£175,000 £175,000 £350,000 Nil Nil
£200,000 £300,000 £500,000 £70,000 Nil
£250,000 £400,000 £650,000 £130,000 £60,000
£400,000 £600,000 £1,000,000 £270,000 £200,000
£750,000 £750,000 £1,500,000 £470,000 £400,000
£1,000,000 £1,000,000 £2,000,000 £670,000 £600,000

For a Married Couple:

Value of family home Value of other assets Value of the estate IHT liability now IHT liability from April 2020
£175,000 £175,000 £350,000 Nil Nil
£200,000 £300,000 £500,000 Nil Nil
£250,000 £400,000 £650,000 Nil Nil
£400,000 £600,000 £1,000,000 £140,000 Nil
£750,000 £750,000 £1,500,000 £340,000 £200,000
£1,000,000 £1,000,000 £2,000,000 £540,000 £400,000