New inheritance tax allowance might affect family housing market

Family Law|October 8th 2015

The government’s new inheritance tax (IHT) measures might affect the levels of family housing on the market according to leading real estate provider Savills.

The Conservative government revisited IHT thresholds in the post-election summer budget. Currently, there is no IHT payable on the first £325,000 of an individual’s estate, with everything else being subject to 40 per cent tax. In the budget, the Chancellor added a new tax-free band of £175,000 on a main residence, giving a total tax-free allowance of £500,000. Because the allowance is transferable from one spouse or partner to another on death, the survivor could have an allowance of £1 million to pass on to descendants. The new allowance on main residences will be phased in from 2017 and reach its full level in 2020.

It’s likely that the increased allowance will benefit home owners in the south of the country. In a policy response report to the new IHT measures, Savills point out that 50 per cent of IHT receipts come from tax payers in London and the south east and an additional 20 per cent are from the east of England and the south west. They also note that for those liable to pay IHT, residential property made up just over one third of the value of assets at the time of death.

The budget did include measures to protect downsizers. They will be eligible for an ‘inheritance tax credit’. This means if they release cash that was once part of the value of the more expensive property, they will still be able to pass on the same value of the estate as if they had not downsized.

Despite this protection, Savills say that the increase in the IHT threshold does nothing to encourage downsizing.

Lucian Cook, Savills Research said:

“Analysis suggests the over 65s hold 44 per cent of equity held in owner occupied housing.”

Savills say that releasing that equity is an important part of helping younger generations access and climb the property ladder. The changes in the IHT allowance will help people hold on to more of that equity. But, it’s also likely that it will remain locked up until homeowners pass away. This means it will only be available to younger generations when they get older.

Many older people remain in houses which are too big for their needs. The 2011 census found that 3.14 million properties that were owned outright had at least two bedrooms per occupant. Savills point out that actively encouraging downsizing in other ways would help the younger generation access the different levels of the property market. They suggest offering stamp duty relief, and more emphasis on good quality retirement housing.

The new IHT allowances do not benefit everyone equally. When a single parent leaves their estate to children or grandchildren, they will not receive the full benefit of the new allowance. Because a single parent cannot take advantage of a partner’s tax-free allowance, they will only have a maximum of £500,000 IHT to pass on.

If a property is worth over £2 million, for every £2 of value over that value, £1 will be deducted from the new ‘main residence threshold’ from 2017.

Read Savills full report here

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  1. Andrew says:

    “Many older people remain in houses which are too big for their needs. The 2011 census found that 3.14 million properties that were owned outright had at least two bedrooms per occupant.”

    How often does it have to be said? When children grow up and leave and their bedrooms become studies, book-rooms, hobby-rooms, guest-rooms, or some combination, that is not under-occupation; it is different use. People in that position are not greedy, not hoarders, not being unfair; they are using what is theirs. They are under no obligation – legal or moral – to sell up, move somewhere smaller where they will not have space for their hobbies or for their children and grandchildren to stay.

    Typically they will have worked all their lives for what they have and now it is their turn to enjoy it. Please don’t try to get them on the Guilt Trip.


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