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Retirees could upsize to avoid inheritance tax charges

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Many retired people could look to buy bigger properties in order to avoid inheritance taxes being charged.

A major announcement by Chancellor George Osborne in his July Budget changed the inheritance tax system for properties. Under new rules couples will be able to pass up to £1m of assets, including a property, to their children or grandchildren tax-free.

With many retirees currently downsizing to smaller properties in their later years, they risk losing these tax free benefits. The introduction of a ‘family home allowance’ will also be introduced incrementally between 2017 and 2021, affecting the tax status of properties.

To gain the most benefit older people could now look to upsize their properties, Ian Dyall, head of estate planning at Towry, has warned.

“Say you live in a modest house worth £200,000, and you have plenty of liquid investable assets set aside. In order to fully utilise the £350,000 upon the death of the second spouse, it may be worth considering ‘upsizing’ a property from existing investments,” he said.

“You could then have a property worth £350,000 which can be passed on to children or grandchildren in its entirety, not affecting the remaining two nil rate bands of £650,000, which can represent any other assets held by the couple.”

The government has stated that nobody will be disadvantaged by the new tax rules, but Dyall said people will be sceptical of such a claim.

“Despite government assurances over downsizing, some people will undoubtedly consider keeping their property for longer and, in examples such as these, some may even move into a larger property during retirement, rather than out of it.”

He added: “The government has made it very clear in this Budget that the total number of estates which will make a contribution to inheritance tax will continue to rise by the end of this decade. With property prices continuing to make significant gains and the nil rate band frozen until at least 2021, there will be an increasing number of people caught out by having a total estate exceeding the £2m figure.”

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