Inheritance tax advice has taken a U-turn after Chancellor George Osborne unintentionally opened a legal loophole for pensioners.
In his Summer Budget, Osborne confirmed a Tory election manifesto promise to expand the nil rate band for inheritance to £1 million from £650,000.
Claiming the extra £350,000 takes some working out – but wealthy married pensioners who have downsized their homes and hold cash or other investments can benefit if they are smart.
Instead of downsizing, says Ian Dyall, head of estate planning at advice firm Towry, they should upsize to a home worth £350,000.
Effectively that gives each a £325,000 nil rate inheritance tax (IHT) band – and an unused nil rate band can be passed to the surviving spouse. That makes £650,000 in cash and assets that can pass down the line tax-free.
Save £140,000 in tax
Add to that the extra £175,000 IHT family home allowance for each spouse and that totals £1 million that in property and other assets that can be passed on to family or loved ones without paying any tax.
If that £350,000 remained in savings or investments rather than property, the entire amount would be taxed at 40% – a bill for the estate of £140,000.
Instead, the property can be passed on and sold shortly after inheritance without incurring any capital gains tax bill – assuming the value remained around the same as on the date the surviving spouse died.
Dyall explains conventional tax planning involves older homeowners downsizing to convert their assets to cash, but under the new rules, if they do so they are potentially missing out on a significant tax saving on their estate.
The new family home allowance takes effect from April 6, 2017.
Rising home prices
Osborne has also confirmed that IHT bandings and rates will remain as they are until the end of this Parliament in 2020.
“These new rules are like to make elder people reconsider about downsizing to protect their wealth,” said Dyall. “The idea was to keep an election promise so couples could pass on their home to their families or loved ones.
“I can see couples moving to larger rather than smaller properties to take advantage of the family home allowance.”
He also explained that more families are likely to come within the scope of IHT over the next five years despite the new allowance as the rising price of homes is expected to push on until at least 2021.