Inheritance tax is one of the more controversial taxes in the UK with critics asking the question why you pay taxes when you are living and further taxes once you die. The Conservative party has been looking towards inheritance tax changes for over seven years now and it looks as though the Chancellor George Osborne will finally deliver in his forthcoming budget speech. So, how will property be treated under future inheritance tax regulations?
Increasing inheritance tax allowance
Under the current system individuals with estates worth in excess of £325,000 will pay 40% on assets above this figure. The allowance for a couple, married or civil partnership, is currently £650,000 with a 40% tax charge on assets above this figure. From 2017 this figure will increase to £500,000 and £1 million respectively although there is some small print.
The additional £175,000 and £350,000 will relate only to property assets with other assets such as cash, shares, etc still coming under the old inheritance tax allowance limits.
How will this impact inheritance tax liability?
In simple terms with the value of property in the UK likely to increase significantly in the longer term individuals with property worth in excess of £500,000, or couples with a property worth in excess of £1 million, will only pay inheritance tax above these figures. There had been concerns that those approaching retirement may well be forced to downsize because of cost concerns and in doing so increase their potential inheritance tax liabilities. However, the Chancellor will allow those impacted to defer their allowance until death.
In effect this means that they will be able to use the inheritance tax property allowance even if they moved out of the more valuable property many years before. This would seem to allay fears that those forced to move out of their property would lose out in later years if their part liquidated assets were disallowed from the so-called “family home allowance” extra on top of the traditional inheritance tax allowance.
Is £1 million an expensive property in the UK?
When you bear in mind that the forecast changes have the potential to remove 94% of people from the inheritance tax trap this reflects the growing price of property in the UK. Let’s not forget that many homeowners would prefer to hand down their properties to their children that this has not always been possible due to inheritance tax liabilities.
There will no doubt be arguments that this inheritance tax “tweak” will benefit the in rich society more than those at the lower end of the income scale. In many ways this is true but why should homeowners be subjected to inheritance tax on the family home which many plan to leave to their children?
This is the first real change in inheritance tax for some time now and comes seven years after the Conservative party promised change. Whether or not the recent coalition with the Liberal Democrats blocked such a move is debatable but it seems that finally inheritance tax changes are afoot.