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The proposed inheritance tax relief for family homes

In one of our pre-Budget blogs we wrote about the likelihood that the Conservatives would announce a new Inheritance tax (IHT) relief for property during the election campaign and the announcement of this proposed change was made at the weekend. The details appear to be similar to that set out in our previous blog ie an additional £175,000 allowance applicable to “family homes” and transferable between spouses and civil partners. The practical effect is that, if a couple’s estate includes property, when the proposed new relief is added to the existing transferable nil rate band (£650,000 for a couple in 2015/16) then estates up to £1 million will be exempt from IHT.

These proposals throw up a number of questions:

  1. Where couples have more than one property how will the “family home” be identified? Will there be an option for couples to elect which is their family home for IHT purposes as with Capital Gains Tax main residence relief?
  2. As the new relief relates only to property, it would appear at the moment that someone moving into a care home, and selling their home to fund fees, would lose the new relief and face an additional IHT liability. For example, Margaret, a widow, lives in an £850,000 home which under the proposed new relief would be free from IHT. She is forced to move into a care home due to ill health and wishes to sell the property to help fund her fees. She does not wish to defer payment by charging her home. On selling, Margaret’s estate then faces an £80,000 IHT liability unless the new relief were to apply to the proceeds of sale of a family home also.

If the proposal had instead raised the IHT nil rate band (which has been frozen since 2009) then the problem highlighted by Margaret’s situation would not arise and we would also not be faced with the potential complications of the new relief being tapered once an estate exceeds £1 million. The proposed new relief, which would come into effect in 2017, seems a  complicated way of achieving an IHT reduction.