Is the inheritance tax threshold really £1 million?

Last month saw the introduction of an inheritance tax (IHT) threshold top-up designed to help spouses leaving the family home to children on death with reduced tax charges.

The eye-catching headline is that estates will have a £1 million IHT threshold but the devil is always in the detail. Many people do not realise the strict criteria for it to apply and that the £1 million threshold won’t apply until 6 April 2020.

IHT is charged at 40% on estates worth more than £325,000 (the nil rate band), or on estates worth more than £650,000 for spouses and civil partners. It is also subject to other potential factors such as the impact of gifts made in the seven years before death.

Since 6 April 2017, homeowners can benefit from a family home allowance allowing them to pass their home on to their children or grandchildren tax-free or with a reduced tax burden after their death. This will be phased in with £100,000 applying now, increasing by £25,000 each tax year until the additional amount hits £175,000. When the £175,000 is added to the £325,000 it totals £500,000 and for spouses means £1 million by 2020.

The additional allowance is specific to a residential property and not the rest of an estate. For example, a £2 million estate comprised of just stocks and shares will not qualify.

Further, it is only available where the residence passes to the deceased’s descendants or their spouse and then their descendants. Descendants include step-children, adopted children, fostered children and children the deceased had guardianship over.

Finally, if an estate has a net value of £2 million or more then the additional nil rate band will be withdrawn at £1 for every £2 over the £2 million threshold, so that higher value estates lose the benefit altogether.

The new rules will clearly benefit some but the criteria are complex. If you have not reviewed your Will recently it would certainly be worth you doing so now.