New Rules on Family Home and Inheritance Tax

Are you ready for the new rules on the family home and inheritance tax which apply from 6 April 2017?

Lisa Baker sets out the new rules relating to the new family home allowance. Lisa qualified as a solicitor in 2001 and has helped individuals and families with wills, inheritance tax, lasting powers of attorney and estates for over 15 years.

The existing inheritance tax position

Inheritance tax is a tax on certain lifetime gifts and the value of your estate when you die. The first £325,000 (based on current figures) is free of tax. The balance of the estate is taxed at 40%, however there are reliefs for certain assets such as business or agricultural property and assets passing to charity.

Transfers of assets between spouses or civil partners are free of inheritance tax and will not use the £325,000 threshold.

When the surviving spouse or civil partner dies, a claim can be made for any of the unused £325,000 threshold. There is therefore a potential tax- free allowance of £650,000 per couple.

The new family home allowance

From 6 April 2017, in addition to the existing £325,000, if you own your family home and leave this to children or grandchildren, a new family home allowance will be available in respect of this property.

This allowance starts at £100,000 in April 2017 and rises to £175,000 in April 2020.

This is an additional allowance to add to the existing inheritance tax nil rate band of £325,000.

Any unused family home allowance may be transferred between spouses or civil partners if it is unused on the first death. By April 2020, on the death of the surviving spouse or partner, the family home allowance could amount in total to £350,000. An inheritance tax free amount of £1 million pounds per couple could potentially be available.

However, if an individual owns net assets worth more than £2 million, the family home allowance is withdrawn at a rate of £1 for every £2 over the £2million amount.

How will the new family home allowance affect me? I am married but we do not have children. We were thinking of leaving our property to our niece.

The interest in the property must be inherited by children or grandchildren, this does include step-children and adopted and foster children. However if the property is left to nieces and nephews, the new family home allowance will not apply.

My husband and I were thinking of moving to a smaller house, should we do this now in view of the new rules?

You may downsize now and the family home allowance residence is not lost. The family home does not have to be owned at the date of death to qualify. It must be borne in mind that the family home allowance can only be set against the net value of a property so only a small proportion of the allowance may be available if there is a large outstanding mortgage or equity release.

You should keep records of transactions to ensure that the claim may be made.

My Will sets out that the assets in my estate pass into a trust on my death. Should I change my Will in view of the new family home allowance?

It is advisable for your Will to be reviewed so that the exact nature of the trust can be determined. Depending on the type of trust in your Will, the family home allowance may or may not apply.

If your Will provides that your property is left to a discretionary trust, you will not qualify for the relief. However under current legislation, the property may be redirected into another qualifying trust or redirected to children or grandchildren. The new family home allowance will then apply.  However there is a 2 year window from the date of death for this to be done. In addition, it cannot be taken for granted that this legislation will be available at the date of death.

 If you would like to discuss any of the issues raised in respect of the family home allowance or any other queries in respect of wills, trusts, estates or lasting powers of attorney please e-mail Lisa on lisabaker@chadlaw.co.uk or telephone on 0113 225 8803.