Our Partner Nimesh Shah appeared on London Live TV on Saturday 4 July to discuss the proposed increase to the inheritance tax ("IHT") nil rate band and how it could affect London homeowners.
The family home and the IHT issue
The current IHT nil rate band of £325,000 has been fixed since 2009 and wasn’t expected to rise until 2018. With the average house price in London now at £476,000 (compared to £180,000 for England and Wales), the freezing of the nil rate band at this level has become a problem for even the average household. A single person owning an average priced property currently faces an IHT liability of just over £60,000 (assuming no mortgage).
An increase to the nil rate band is long overdue with ever increasing house prices in London and the Conservatives proposed in their manifesto to effectively increase the IHT threshold to £1 million, by introducing a transferable £175,000 main residence allowance. Comments over the weekend by George Osborne suggest that this measure will definitely be announced during Wednesday’s Summer Budget.
Whilst a £1million IHT threshold is attractive to many couples, single persons are only likely to benefit from a £500,000 limit – therefore, it will not take much in London house price inflation to reach this level soon. One would hope that the £1million nil rate band will increase with inflation (which it hasn’t done since 2009). In addition, the Conservative manifesto commented that this measure will be ‘available for all but the richest’, so it remains to be seen who and exactly how many homeowners will benefit.
What can be done?
Even despite the proposed increase to the IHT nil rate band to £1million, what can be done to plan for IHT for the family home, which is often a person’s most valuable asset?
Firstly, it's vital to have a Will, so the property passes to the person you want it to. Having a Will doesn’t necessarily have anything to do with saving IHT and you are merely specifying who you want your assets to go to when you die. This is especially important if you are single as you do not want value passing to elderly family members as there could be two bites of IHT to pay.
It's a misconception that you can simply give away the family home to your children and continue to live in it because the law concerning IHT effectively says the value of the property remains in your estate because you retain a benefit to it. Everyone would do that otherwise! You could give away the property to your children and you could rent it from them. However, you would need to pay a market rent and your children would need to pay income tax on the rental income, so you would need to calculate the IHT saving against the annual income tax liability.
Historically, certain planning arrangements claimed to protect against IHT for the family home, but these types of structures have long been closed by HMRC. In addition, it’s not advisable to create complicated structures for the family home – ultimately, it’s an important asset for the family that most do not want to risk.
IHT is viewed as an unfair tax and essentially double taxation. A person pays their mortgage during their lifetime from net income i.e. from money they’ve earned after paying tax. When the person dies, they are taxed on the same value again.
A major problem for the estate can often be how to fund the IHT liability as there may not be sufficient cash to pay the tax and so beneficiaries may not have any option but to sell the family home to generate the necessary funds.
For more information, please contact Nimesh Shah or your usual Blick Rothenberg contact.