The effective inheritance tax threshold will be £1m, chancellor George Osborne has confirmed, meaning the family home will be taken out of inheritance tax for all but the wealthiest.
Mr Osborne and the prime minister alluded to this measure when they wrote in the Times newspaper last weekend, as they said that those who worked hard for their homes should be able to pass them on to family members.
At present, inheritance tax is payable at 40 per cent on the value of an estate in excess of the tax-free allowance of £325,000 per person. Married couples and civil partners can pass the allowance on to each other.
Today, Mr Osborne confirmed in the summer Budget that the government will introduce an additional nil-rate band when a residence is passed on death to direct descendants.
Per person, this will be £100,000 in 2017 to 2018, £125,000 in 2018 to 2019, £150,000 in 2019 to 2020, and £175,000 in 2020 to 2021.
“This means that the effective inheritance tax threshold will be £1m,” the summer Budget document said.
It will then increase in line with CPI from 2021 to 2022 onwards. Any unused nil-rate band will be transferred to a surviving spouse or civil partner.
It will also be available when a person 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 descendants.
However, this element will be the subject of a technical consultation.
There will also be a tapered withdrawal of the additional nil-rate band for estates with a net value of more than £2m.
Andrea Rozario, chief corporate officer at equity release adviser Bower Retirement Services said: “The £1m inheritance tax threshold will end a lot of unnecessary confusion about retirement planning with people focusing on beating IHT at the expense of their own comfort in retirement.
“Homeowners who are asset rich but cash poor should be concentrating on how best to ensure they maximise their income in retirement and property wealth should be part of the solution.”
She added that the furore on IHT is “slightly out of proportion” as just one in 10 estates currently pay the tax which is “not insignificant but is not the biggest issue in retirement”.
“There is concern that the new threshold will encourage people to stay in their homes in order to ensure as big an inheritance as possible.
“That will not help the housing crisis in the country and nor is it necessarily the best use of their assets. Bigger houses need a lot of maintenance and funding that will be challenging from pension income alone.”