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Proposed tax cut on family homes – how will it affect me?

In the build up to the 2015 General Election, the Conservative Party has announced a change in the way Inheritance Tax is applied to the family home.

In the build up to the 2015 General Election, the Conservative Party has announced a change in the way Inheritance Tax ('IHT') is applied to the family home. Its manifesto states: "We will take the family home out of tax … by increasing the effective IHT threshold for married couples and civil partners to £1 million, with a new transferable main residence allowance of £175,000 per person." Chancellor George Osborne commented this move "supports the basic human instinct to provide for your children".

At present, IHT is payable at a rate of 40% on the value of an estate over and above the tax-free allowance (known as the 'nil-rate band') of £325,000 per person. Married couples and Registered Civil Partners can pass the allowance onto each other, effectively resulting in an allowance of £650,000 between them.

Under the Tories' proposals, each individual would each be offered a further £175,000 'family home allowance'. Thus, parents with a nil-rate band of £650,000, plus two helpings of the family home allowance of £175,000 (i.e. £350,000) could pass property worth up to £1m onto children or grandchildren free of tax.

What will the proposals mean in real terms?

Families with sizeable properties will certainly welcome the proposals and it is of highest benefit to 'property-heavy' estates, particularly in London and the South East. It is also an attractive proposal to those with valuable property from £1m upwards, as the new allowance will also apply on a sliding scale (which gradually reduces) on homes worth up to £2.35m.

Additional positive implications include the retrospective nature of the proposals: the additional allowance would be transferable even if one spouse had died before the policy came into effect. As such the policy would benefit existing widows and widowers.

However critics have noted this proposal skirts around the main issue of increasing the IHT nil-rate band of £325,000. The nil-rate band remains at the same level it was back in 2009 and will continue to be frozen through to 2018. As such, individuals who hold other valuable assets and have varied their wealth (via investments and savings etc) will not reap any benefits and the £175,000 extra allowance will apply to property only.

The transfer will also only apply from parent to child (or grandchild as the case may be). Transfers of a main residence to other family members, relatives, partners (i.e. non Registered Civil Partners) or friends will not be included.

Furthermore, independent economists have commented on the potentially damaging effect on the property market on a wider scale. It is feared the policy may drive up property prices by encouraging investment in owner-occupied housing and could possibly discourage downsizing later in life when this might otherwise be appropriate.