A review of inheritance tax thresholds could make it easier for parents to give their children money to buy a home, fund their education or set up a business.
Currently, the maximum sum that can be gifted tax free is £3,000 a year. Any additional funds are subject to 40% inheritance tax if the donor dies within seven years of making the gift.
The threshold has been frozen since 1981, when £3,000 would have been enough for a deposit on the average home.
Today, it would take seven years of gifting £3,000 to save for an average deposit of £21,000 for first time buyers. Had the threshold risen in line with inflation, then it would stand at around £12,000.
Chancellor Philip Hammond has called for a review to bring inheritance tax thresholds up to date. It’s estimated that a change to the threshold could benefit up to three million young people a year.
The review is part of an ongoing commitment to look at bringing inheritance tax thresholds up to date.
Figures released by the Office for Budget Responsibility (OBR) show that the number of family estates liable to inheritance tax has risen fourfold since 2010 from 10,000 to more than 40,000.
Inheritance tax is set at 40% and becomes payable once the tax-free threshold of £325,000 has been passed.
The government has recognised that more and more families are being caught by the tax and has introduced an additional main residence allowance of £100,000. It came into effect in April last year and only applies to a person’s home, not the rest of their estate. It will rise gradually to £175,000 by 2020.
When added to the £325,000 nil-rate band for inheritance tax, this will provide a combined tax-free band of £500,000 by 2020. Married couples can combine their allowances. When one partner dies, their share of the estate is passed on to their spouse free of any inheritance tax.
This means that by 2020, a married couple could have a combined allowance of £1m.
Paul Morton, tax director of the Office of Tax Simplification who will carry out the review, said: “We know lots of people in the Bank of Mum and Dad generation must be thinking very hard about the future.
“We are going to be looking at technical aspects and the experiences people have when planning for inheritance tax.”
We shall keep our clients informed of any developments.
A little planning now could save your families thousands of pounds in the future. Please contact us if you would like more information about the issues raised in this article or any aspect of inheritance tax planning on 02920 345511 or firstname.lastname@example.org