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Inheritance tax: is ‘upsizing’ the best way to benefit from the increased allowance?

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Written by: Paloma Kubiak
25/02/2016
By 2020 parents will be able to leave property worth up to £1m to their children without them having to pay inheritance tax (IHT) which could set the trend for families ‘upsizing’, experts predict.

Currently, no IHT is charged on the first £325,000 of someone’s estate – the value of property, money and other possessions – when they die.

Above this threshold, there’s a hefty 40% tax bill.

But if you’re married or in a civil partnership, then on death any of your estate which passes to your spouse does so without any IHT liability. This effectively doubles the amount to £650,000 that a surviving partner can leave behind tax-free.

In last year’s Summer Budget, Chancellor George Osborne announced a main residence nil-rate band for an estate which would lift the combined allowance to £1m by 2020.

This applies to any married parent or grandparent, or those in a civil partnership when leaving a family home to a direct descendant, including children, grandchildren, legally adopted or fostered children. Here’s how it will work:

  • 2017: Initial £325,000, plus there’s an additional £100,000 nil-rate band = £425,000 per person
  • 2018: Initial £325,000, plus there’s an additional £125,000 nil-rate band = £450,000 per person
  • 2019: Initial £325,000, plus there’s an additional £150,000 nil-rate band = £475,000 per person
  • 2020: Initial £325,000, plus there’s an additional £175,000 nil-rate band = £500,000 per person.

Greater tax benefits in holding a family home

While many people choose to downsize in retirement, accountancy firm Crowe Clark Whitehill said the introduction of the main residence nil-rate band could lead to a trend of homeowners ‘upsizing’ to larger properties with the specific intention of protecting their capital from IHT.

Head of property and construction Stacy Eden, and head of property tax Paul Fay, said holding a family home could soon be more attractive than holding other assets: The key advantage is that IHT is reduced on family homes making it easier for homes to be passed down through the generations.

“The downside is clearly that behaviour can be driven by this change as there is greater tax benefit for IHT purposes in holding a family home rather than cash or another non-trading asset.”

What if I want to downsize?

It is possible to downsize and still take advantage of the enhanced nil-rate band. It is proposed that where the deceased has downsized or ceased to own a residence after 8 July 2015 (the date of the Summer Budget) the enhanced nil-rate band will still be available where the downsized property and/or assets of equal worth to the value of the original property pass to direct descendants.

What if my property’s worth more than £1m?

A family home can be exempt from IHT up to a value of £1m with the benefit phased out for homes valued over £1m at the rate of £1 for every £2 over the threshold. The benefit is completely withdrawn if the home is worth £2m.

What if I’ve more than one property?

The enhanced nil-rate band is limited to one residential property but where there is more than one property in the estate, you can nominate your residential property. One point to note is that you do have to live there for some of the time.

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