Posted: Monday, 14 December 2015 @ 10:54
It is well known that the inheritance
tax-free threshold will be raised from £325,000 per person to £500,000 for
homeowners passing their main residence to their direct descendants.
At the moment the legislation looks flawed.
Recent criticism has come in from MP Andrew Tyrie, the Conservative
Chairman of the Treasury Select Committee who has written to Chancellor
George Osborne demanding that the changes are simplified and then implemented
rapidly to give those planning their wills some certainty.
The danger is that people will not understand the changes and will be less likely to make a will. It is tough enough to get people thinking about doing a will without the government making it more difficult.
Some lawyers may be (over)cautious in giving advice. They may not understand it themselves.
Some specialist tax lawyers and accountants may be happy and can charge clients more.
Confusion results in a number of areas.
Compare to the current nil rate band(£325k) which everyone understands...
Here is a flavour.....
Complication 1 - The legislation allows an owner to sell their house in order
to downsize in old age, but keep some of the proceeds for their children. This
tweak was designed to ensure the elderly do not stay in large homes that they
do not want or need purely for tax reasons.
Complication 2 - the rules are not yet finalised and are
only expected to apply to homes inherited after April 6, 2017, leaving those
writing their wills now uncertain as to the tax status of their estate when
Complication 3 - It will be phased in - From April 2017 the Government is
introducing a new, additional tax-free allowance for people who own a home.
This is called the “family home allowance”. It will eventually be worth an
additional £175,000 per person. Added to the £325,000 allowance that everyone
gets, this means a new allowance for property owners of £500,000 – or £1m for
Complication 4 - Estates that are worth more than £2m will lose some or all
of the family home allowance, which will be tapered at a rate of £1 for every
£2 over the £2m threshold.
Complication 5 - The family home allowance and the taper threshold will
increase in line with inflation as measured by the consumer prices index (CPI)
from 2021-22. Need to know that.
Complication 6 - Be careful who your family is.To qualify for the family home allowance, the property
must have been the main home at some point and must be left to one or more
direct descendants. This includes children, stepchildren, adopted children and
foster children, and grandchildren, but not other relatives such as a nieces
Complication 7 - If a home is sold or downsized on or after July 8 2015,
the family home allowance will still be available as long as assets of an
equivalent value are passed to direct descendants.
Complication 8 - If one partner dies before April 2017 the survivor will be
able to use both of their family home allowances when he or she dies. This is
regardless of other factors such as whether the first spouse owned a share in
the property or had already passed a share to children.
Complication 9 - The value of the house matters. The value of the home may be relevant but is relevant only if it is lower than
the family home allowance. If a £300,000 property was left to children following
the death of the second spouse in 2022, for example, after the full £175,000
allowance has taken effect, the family home allowance of £350,000 (2 x
£175,000) would be reduced to £300,000. The balance of £50,000 cannot be offset
against the other assets.
Complication 10 - If the house is owned in just one name you can qualify for the allowance if the deceased must have an “interest” in the property to
qualify for the allowance, so it should be transferred into joint names (in any
ratio – it doesn’t need to be equal) for both spouses to qualify.
I could go on but it gets even more complicated!