Tories set to slash inheritance tax on main residence with tax threshold of £175,000 for each parent

17th March 2015

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The Government is considering radical plans to increase the inheritance tax threshold on a family’s main property to £1m.

According to plans drawn up by the civil service and seen by the Guardian, parents could pass on a property worth 31m without paying IHT.

The newspaper reports that the plans are not likely to be included in tomorrow’s budget however which is still a coalition responsibility.

A move to change the IHT rules while in Government was apparently blocked by the Liberal Democrat coalition partners.

IHT reform was also mooted by the Conservatives before the last election.

The tax break would cost around £1bn and would have by far the greatest impact in London and the Southeast.

The Guardian also reports that the measure would reduce IHT on larger houses worth £2m by £140,000 with the papers saying it would mostly benefit higher income houses.

The report says that the paper says that 2019-2020, just over 20,000 fewer estates annually would have any inheritance tax liability under the plan.

The inheritance tax plan would see the creation of a new tax-free band worth £175,000 per person on a family home, one that can be transferred between married couples, making it worth a maximum of £350,000.

The new nil rate band would apply to the value of a family home or other main residence transferred to a direct descendant of the deceased, including step children and adopted children though other family members would not be able to benefit.

The Guardian scoop also reports that  officials writing the paper believe that the proposal “will generally be very popular with the public and in the media. It will allow you to say you are exempting those with modest homes from inheritance tax (with up to £1m of assets).”

“This reflects the concern raised by the public about rising house prices increasingly leading to estates with a modest house particularly in London and the south-east paying inheritance tax.”

The paper suggests that benefit of the exemption would be removed or reduced altogether though a taper for estates worth more than £2m, meaning some estates would be paying substantially more.

Rachael Griffin, financial planning expert, Old Mutual Wealth says: “The proposed rise in the IHT level is a welcomed move. The IHT band was frozen at £325,000 back in April 2009. Since then, average house prices have risen by 20.3%, making the current IHT threshold vastly out of date with current property prices, leading to more families being caught by IHT. If IHT had kept pace with house price inflation, the £650,000 joint IHT allowance would stand at £781,950* today, so this proposed move to £1m would be a progressive move.

“The full details of the proposal are yet to be thought through, but having a separate property IHT exemption could make estate planning more confusing.”

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