IHT reduced on family homes

Chancellor George Osborne used his 8 July Budget to announce a widely trailed measure to take more family homes out of inheritance tax (IHT).

Mr Osborne said that IHT – levied at 40 per cent on estates worth more than £325,000 – was originally designed to be paid only by the very rich, adding: “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.

“From 2017, we will phase in a new £175,000 allowance for your home when you leave it to your children or grandchildren. It sits on top of the existing £325,000 threshold, which will be fixed until the end of 2020-21. Both allowances can be transferred to your spouse or partner.”

The effect of the new allowance – called the main residence nil rate band – will be to create an effective IHT threshold of £1 million by 2020-21.

The main residence nil rate band will be set at £100,000 in 2017-18, up to £125,000 in 2018-19, up to £150,000 in 2019-20, and up to £175,000 in 2020-21.

The band will also be available when a person downsizes or no longer owns a home on or after 8 July 2015 and assets of an equivalent value, up to £175,000 in 2020-21, are left to direct descendants – including step-children and adopted or foster children – on their death.

The main residence nil rate band will be withdrawn on a tapered basis for estates with a net value of more than £2 million.