Will £1M homes be IHT-free under a Conservative Government?
There have been many headlines flying about recently about the prospect £1M homes being free from inheritance tax (IHT) should Conservatives get into government. If you have not read the detail you would be forgiven for getting the impression that such homes are simply taken out of the IHT net while other assets fall within the IHT it. This is not the case.
The proposed rules boil down to the fact that there will be a provision for spouses and civil partners to have their IHT nil rate bands increased from £325,000 to £500,000 when a home is in their estate. For a home worth £1M nil rate bands would increase to £500,000 which would effectively take the home out of IHT – on the basis that all nil rate band is set against the home.
For homes of between £2M and £2.35M there is to be a tapering so that there will be no IHT benefit on homes over £2.35M.
Couples who own properties worth between £1M and £2M would take maximum benefit (or their beneficiaries would) from these rules with their estates saving £140,000 in IHT (£350,000 @ 40%). This would provide an IHT incentive for couples worth £650,000 and less to upscale – conversely at a time when most are looking to downscale.
Mr and Mrs Jones own a £650,000 property and other assets worth £1M. If they do nothing their estate would bear IHT of £400,000 (40% of £1M). If they were to use some of their other assets to upgrade to a house with a £1M value then (all other things being equal) their estate would bear IHT of £260,000 (40% of £650,000). This example ignores moving costs such as SDLT which would be payable.
Whether couples will behave in this way remains to be seen although the new rules could provide a good excuse for couples looking to trade up.
There would also be a new motivation for estates to argue for high probate values on properties worth between £650,000 and £1,000,000 where previously there was a desire to justify a low value. This is because, as we have seen, there is no marginal IHT on values between £650,000 and £1M, however beneficiaries would be keen to acquire the property at a high base cost (probate value) so as to limit future capital gains tax exposure – especially if they are holding onto the asset.
These new rules would be welcomed by many homeowners although they are not as attractive as they first look. Beneficiaries of estates which do not own properties worth more than £650,000 may justifiably feel hard done by because they are being prejudiced by not inheriting an estate including property. There are also many who feel that IHT nil rate bands should be at about £500,000 across the board by now anyway, given that they have not risen in over 6 years.
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