Yesterday, George Osborne set out his intention to deliver an emergency Budget that put security first – “a big budget for a country with big ambitions.”
The family home allowance” amendments really caught the team at Macbeth’s eye and we welcome these incoming changes. From the 6th April 2017, the “family home allowance” will extend the existing £325,000 individual allowance by £175,000. The changes mean individuals can pass on assets worth up to £500,000, including a home, without paying any Inheritance Tax at all. So if you’re married or in a civil partnership, you can pool your allowances to a total of £1m. The “family home allowance” will be gradually removed from estates worth more than £2m.
This really takes the pressure off anyone who owns a property worth up to £1m, allowing them to leave it to successors completely free of inheritance tax from April 2017. Up until now, a major concern for Macbeth clients had been the prospect of their children or grandchildren potentially losing up to 40% of their inheritance after allowances.
It also creates more flexibility around inheritance tax, and will be welcomed by older clients who are already thinking about protecting their assets. We anticipate a new set of behaviours in the property market; those wanting to downsize to a smaller property will now be eligible for an “inheritance tax credit”. This means they can sell their property, buy a cheaper one and still qualify for the new threshold having owned the higher value property, as long as the majority of the estate is inherited by their direct descendants.
We welcome this far-reaching move. The media has widely reported on the bottleneck effect older people have had on the housing market, as they remain in homes that are too big for them to avoid the impact of inheritance tax. Yesterday’s announcement will certainly open the market up, freeing up larger properties for growing families.
Of course, not everyone will come out of this a winner. The increases in the allowances will lead to a fall in revenue for the Treasury. To offset this, there will be a reduction in pension tax relief for higher earners. This comprises a tapering of tax relief on pension contributions for those earning more than £150,000 through to those with earnings of £210,000. The changes mean that the higher earners will be limited to just £10,000 of contributions eligible for tax relief, down from the current allowance of £40,000 per year.
To find out how the Budget changes affect you, please contact Simon Claxton.