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For several years, raising the inheritance tax (IHT) threshold to £1million has been proposed and finally it is here – or is it?

The chancellor announced in the July 2015 budget that the family home will benefit from an additional IHT allowance, potentially bringing the IHT nil-rate threshold up to £1million for spouses and civil partners. But we will have to wait five years for the rules to come fully into force and there are several key conditions on how the allowance will work.

The current position is that IHT is charged at 40% on estates worth more than £325,000, or on estates worth more than £650,000 for spouses and civil partners . This is subject to other potential factors like the impact of gifts made in the seven years before death.

From April 2017, each individual will be offered a family home allowance so they can pass their home on to their children or grandchildren tax-free after their death. This will be phased in from 2017/18, when the additional IHT allowance will be £100,000 and increased by £25,000 increments each subsequent financial year until the additional amount hits £175,000 in 2020/21. So, it is not until 2020/21 that the £1million benefit arrives.

In additional to the phasing-in of the allowance, there are three very important conditions:

First, the additional allowance is specific to the main home of the deceased and not the rest of their estate. So a deceased person with a £3million estate comprising just  stocks and shares and no real estate will not get the additional allowance.

Secondly, it is only available where the main residence passes to the deceased’s descendants (children or grandchildren). Where the beneficiaries are other family members or someone unrelated then the allowance does not apply. We are unsure at the moment whether step-children would qualify.

Thirdly, if an estate has a net value of £2million or more then the additional nil rate band will be withdrawn at £1 for every £2 over the £2million threshold.

Further, there is the possibility that the additional allowance will still be available when a person downsizes or ceases to own their home before their death, but this technical point has yet to be elaborated upon.

These new rules will clearly benefit many families, but the criteria are complex. We shall watch this space with interest.

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.