The Main Residence Allowance has been talked about for a while now, but it is only from April 2017 that it is now available. This new tax allowance comes in the form of a separate nil-rate band relating to the value of the family home, or main residence. It effectively means that the value of your estate that is taxable under Inheritance Tax (IHT) will reduce.
The Main Residence Allowance – how does it work?
Dubbed as the “Family Home” Allowance, this government initiative has been introduced to factor-in the significant growth in the value of property in recent years.
Families currently find large proportions of their lifetime wealth eaten up in massive IHT bills, which frequently link to property.
The current IHT nil-rate band is £325,000.
The Main Residence Allowance is being introduced in stages with the initial nil-rate band starting at £100,000.
By 2020, the government have promised to increase this to £175,000.
This means by 2020 a married couple will have access to £1 million tax-free allowances regarding their IHT, £500,000 for an individual (£325,000 + £175,000).
This table below shows some scenarios, both now and when the full allowance is in operation in 2020.
As you can see, those homeowners with property valued between £200k and £300k will save £70,000 in IHT by 2020.
Couples will save £140k on properties between £400k and £600k and savings will also be made for more expensive properties too.
AdditIonal tax benefits for passing down your property before death
There are additional tax benefits if you choose to pass down a family home and down-size when they are still alive, therefore freeing up their larger home for a family that needs it more.
An IHT credit will be provided in this situation and this is likely to become a key part of Inheritance Tax planning in the future.
If you have children, with children this is worth discussing with your accountant to reveal the full benefits.
The importance of Inheritance tax planning
Tax planning relating to the full range of taxes is essential if you want to save money, in both the short and long term.
Inheritance tax is a core interest when it comes to tax planning, as everyone wants to see their wealth passed down to the next generation.
Even with the new Main Residence Allowance and the current IHT nil rate allowance, your estate could still end up generating a significant tax bill, depending on the extent of your assets, or if you have a particularly high-worth property.
Other measures to reduce your Inheritance Tax include gifting assets or wealth to your family during your lifetime. In order for the gifts to be tax-free you need to survive for a minimum of seven years, including assets held in trust.
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