Property can be passed on with caveats

The nil-rate band will increase each year to £175,000 from 6 April 2020, and increase in line with CPI thereafter.

This is in addition to the existing inheritance tax nil-rate band of £325,000, which will remain frozen until April 2021.

The additional allowance will taper at a rate of £1 for every £2 for estates with a net value of more than £2m.

The additional nil-rate band will only apply to transfers on death and will be transferable between married couples and civil partners to the extent that it is not used on first death.

The additional nil-rate band will not be available to use in relation to assets other than the family or main home, nor is it available where the home is left to family members other than direct descendants.

The additional nil-rate band will also be available when an individual downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to the value of the additional nil rate band, are passed on death to direct family descendants.

These proposals are subject to further consultation later this year.

Joe Priday, managing director of Prydis, says the inheritance tax headline is not exactly as good as it first sounds.

He points out the maximum only comes into play if there is a family home worth more than £350,000, as well as the fact you have to have a spouse, children or grandchildren to pass the home to.

Andy Zanelli, head of retirement planning at Axa Wealth, says ultimately the new additional threshold leaves us with an uneven playing field and an interesting financial planning dilemma.

He warns that those people looking at estate planning now need to consider whether to downsize their home and potentially invest money elsewhere or leave their money tied up in property, knowing they can pass it on to their children free of inheritance tax.

Mr Zanelli says: “The consequence of this move means assets within an estate are treated differently: my wife and I can leave a £1m property to our children without them incurring an IHT charge, however should we choose to downsize and perhaps invest some of that money, anything above the current nil rate band of £325,000 would incur a 40 per cent tax charge.

“Added to this, today’s move is likely to help very few families. Figures verified by the Office of Budget Responsibility suggest that less than 10 per cent of the estates that will be subject to IHT in 2015 to 2016 will be taken out of the inheritance tax net.

“Is this an announcement that seems better than it will actually be in practice?”

In terms of the impact on the property market Jonathan Hopper, managing director of Garrington Property Finders, says although this is good news for homeowners and families, it is bad news for a market short on supply.

He says: “New housing stock levels remains perilously low, and increasing the inheritance tax threshold could actually stifle the supply of properties coming onto the market.

“By increasing the threshold, you could see properties remaining in the family and being rented out, or lived in, rather than sold to pay the tax bill.

“The knock on effect could be even less housing stock coming onto the market, and that could put further upward pressure on property prices.”

This article has been revised since original publication in relation to Mr Priday’s remarks.