1 Million Inheritance Tax Allowance for Home

£1 million Inheritance Tax Allowance for Home.

Chancellor, George Osborne's Conservative only July budget is tomorrow. Already, news is being leaked about various manifesto promises that will be announced.

In the budget, the Chancellor will confirm that a new special property (main dwelling home) allowance will be introduced for inheritance tax. Currently, the inheritance tax allowance is £325,000, meaning that legally married couples and civil partners have a combined inheritance tax allowance of £650,000. An additional allowance will be announced for a further £175,000 for your main home.

This means that if you individually own a home worth £0.5 million or with your legal partner own a home worth £1 million it will be inheritance tax-free when you both pass away.

If you individually owned a home worth £325,000 or less or if you jointly own a home worth £650,000 or less, there is no benefit.

The additional cost to fund the inheritance tax allowance increase on your home will be funded by a reduction in additional rate tax relief (45%) for higher earners in excess of £150,000, who will now only receive pension tax relief on Private pension contributions at 40% instead of 45%.

Comment

This is a con by the Conservatives. The move is designed to encourage you to do nothing with regard to estate planning with your property. This will encourage many couples to leave their share of the main home on their death to their partner rather than to other parties for example children and loved ones. This will then mean that the surviving partner on the death of their first partner, without any action, will own the main home entirely and this home can then be means tested should the surviving partner need to move into social or residential care in later life. Do not be fooled, if you wish your loved ones to inherit money from you, you should take financial planning advice and consider either gifting property in life, when you are healthy, or gift a share of the property on first death as part of your Will.

This move could also fuel and already overpriced property market. Faced with the decision of your investments in ISAs, bonds, bank accounts, unit trusts and investment trusts still being taxed at 40% on death, how many people will liquidate their savings and by even bigger properties to avoid inheritance tax with the new higher allowance for your main home?

There are even rumours that if you downsize your property as your circumstances change for example your children leave home, and you buy a smaller property and release money to supplement your retirement, you will be allowed to retain the highest value of your property for any inheritance tax calculation. Again, we issue a warning that if this is the case, those savings and investments that you have released from your property could still be means tested for care in later life unless you take professional advice and consider some form of estate planning trust.

We guess we will just have to wait and see what the Chancellor has to say.