Inheritance Tax Raised to £1million

Written on 9 July 2015

In the United Kingdom, once you depart from the mortal coil, your 'death estate' left to your bequeathed (other than your spouse or civil partner) is subject to inheritance tax (IHT) at the 40% rate.

This is after applying the nil rate band of £325,000, meaning that it is only the value of your death estate that exceeds this amount that will be taxed. The £325,000 nil rate band was last increased in April 2009, and has subsequently received criticism for not having been raised to reflect the standard of modern living… until George Osborne announced on Wednesday that the nil-rate band will be increased by up to an additional £175,00 when a main residence is passed on death to a direct descendant.

This additional main residence band will be phased in over the course of the next 5 years as follows:

2017/18 – £100,000

2018/19 – £125,000

2019/20 – £150,000

2020/21 – £175,000

From 2020, the full force of the additional main residence band will extend the nil rate band to £500,000 per spouse. It will then increase in line with Consumer Prices Index from 2012-22 onwards. 

If the net value of the estate is above £2 million, the additional nil-rate band will be tapered away by £1 for every £2 that the net value of the estate exceeds this amount. So estates valued at more than £2.35mn will see no benefit from this change.

"I am looking to retire and downsize my property, how does this affect me?"

You do not lose out. Where part of the main residence nil-rate band might be lost due to downsizing to a less valuable residence, or ceasing to own a home after 8 July 2015, the additional part will still be available provided the deceased left that smaller residence, or assets of equivalent value, to direct descendants.

The technical details of how the additional nil-rate band will operate for individuals who have downsized or ceased ownership will be subject to a consultation to be published in September 2015 ahead of the draft Finance Bill 2016.