Inheritance Tax and the family home allowance – bad news for business owners and more complexity on the way!

11 June 2015

As part of their election manifesto, the Conservatives have pledged that they will introduce an additional nil rate band for the family home.

For the period of the last government, the inheritance tax nil rate band sat fixed at £325,000 whilst a house valued at £325,000 is estimated, taking the UK as a whole to have increased in value to approximately £376,000 or, taking London prices the increase would have been to approximately £473,000 (the average London house being worth apparently £514K)!

The proposed new family home allowance provides for an additional £175,000 nil rate band from April 2017, bringing a couple’s combined tax free estate to £1,000,000. This allowance is subject to a taper where the amount being left is more than £2,000,000: £1 of the family home allowance is lost for every £2 of estate value over £2,000,000. 

Information regarding the family home allowance is quite sketchy, details being limited to an internal briefing document leaked to the Guardian. However, it appears clear from this document that business owners will potentially stand not to gain from this new proposal: whilst trading businesses that meet the qualifying conditions are shielded from Inheritance Tax by business property relief and agricultural property relief, for the purposes of establishing the entitlement to the family home allowance, you look at the estate value before any reliefs. Thus the value of any business assets may serve to reduce the entitlement to the proposed family home allowance. 

Without doubt, greater clarity will emerge, however, at first sight, this does mean that individuals with BPR/APR assets will need to carefully consider their wills. Business assets left by one spouse to his or her survivor will impact on that spouse’s entitlement to the new allowance (whilst if it were left on discretionary trust, no IHT would arise because of BPR and the assets would not be comprised then in the surviving spouse’s estate, therefore potentially protecting the family home allowance for the survivor.  

In any case, where the family home allowance is potentially in point, proper consideration will have to be given to the value of assets relieved from inheritance tax by business property relief etc. because of the potential impact of this value on the family home allowance , whereas as matters stand, where IHT is not in point, the value of the business assets is often not formally established. 

Complexities will exist even for individuals without businesses: if one takes a couple worth £3,000,000, let us say with the house worth £2,000,000 and savings etc. worth £1,000,000, all owned equally. On the first death, there is entitlement to the family home allowance as the deceased had an estate of less than £2,000,000 (i.e. the interest in the house worth £1,000,000 and the share of the savings etc. worth £500,000). The family home allowance on the first death is transferable to the surviving spouse. If one assumes that the surviving spouse inherits the entire estate, the survivor, due to this inheritance, has an estate of £3,000,000 so that on that person’s death, no family home allowance accrues and it appears likely that there would be no benefit from the unused allowance from the first spouse’s death as the family home allowance on the second death would be increased by the unused proportion from the first death i.e. the family home on the second death would be doubled to reflect the unused allowance on the first death. This gives no relief as it is 200% of £Nil. 

It would appear that for business owners and those whose estates potentially straddle the value at which the new allowance is to be tapered, care will be required with will planning so as to ensure that reliefs potentially worth up to £140,000 are not wasted. Whilst there is some lag before this relief is introduced, it does potentially impact on wills currently in force or now being put in place.   

For further information, please contact Nigel May or your local tax advisor.