Time to upgrade your home?

12 November 2015

The new IHT threshold for residences is being introduced because family home values are pushing relatively modest estates over the existing nil rate band, causing particular problems where this is the only or main asset, as the heirs might be forced to sell the family home in order to fund the IHT bill.

Make sure you qualify

This new extra threshold produces a total nil rate band of up to £1m for a married couple or civil partners. This is reached by adding: the £325,000 nil rate band, plus the new £175,000 residence nil rate band, plus the unused £325,000 and £175,000 nil rate bands from a deceased spouse.

The new tax free band is being introduced in phases from 2017/18 to 2020/21, exclusively aimed at family residences passed to a direct descendant (or their surviving spouse or civil partner) of the deceased. The resulting relief will be withdrawn in phases on estates of more than £2m. This increase should benefit more than 20,000 estates by 2020.

To ensure your home is covered, it will be worth reviewing your Will(s). For instance, residences left to discretionary trusts, a popular use of the nil rate band in Wills, do not qualify for this treatment.

The rules in place

Initially, there were concerns that people downsizing in later life, or who sold their homes to enter residential care, would be discouraged or penalised from making such plans, as this would move assets out of the main residence nil rate band into other assets chargeable at 40 per cent; a hefty penalty. Rules have been proposed to avoid this issue, preserving the resulting relief as long as a number of conditions are met, and a claim is made.

Upsizing is now an option

There are also planning opportunities in the other direction. If your current home is worth less than £1m, and you plan to leave it to a lineal descendant, you may wish to consider upgrading to a more valuable house, or adding an extension or improvements to increase your home’s value. If the monies you use are currently IHT chargeable assets, you could save up to 40 per cent IHT on the increase in value of the house.

What this means for you

Whether downsizing or upsizing, the rules are complex and it would be worth confirming you qualify for the new residence nil rate band in the first place before making any decisions.

If you are going down one of these routes, record keeping will be key to obtaining the residence nil rate band, as it will be necessary to make a formal claim and be able to back up your claim if challenged.

Maybe now is the time to get that summerhouse or extension you've always dreamed of, and claim it as a piece of prudent financial planning? Please get in touch to discuss how the new rules might apply to you.