Parents and grandparents will be able to leave homes worth up to 850,000 to their children and grandchildren without them paying inheritance tax from tomorrow, with the tax-free allowance rising to 1 million by 2020.

The move, which was announced by former Chancellor of the Exchequer George Osborne in 2015's Summer Budget, means that eventually each parent will be able to leave 500,000 in property up from the current 325,000 per person limit without paying inheritance tax. This will be phased in gradually between 6 April 2017 and 2020.

As allowances can be passed from one deceased partner to the other, when the first dies, their 500,000 allowance transfers to the other, giving the survivor a 1 million allowance.

For more help on how inheritance tax works and how to save 1,000s in other scenarios, see our Inheritance Tax guide.

Martin Lewis
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Existing rule means 40% tax is paid on individual estates worth over 325,000

Under the old system, no inheritance tax is charged is on the first 325,000 (per person) of someone's estate which is the value of their total assets they leave behind when they die. This is called the nil-rate band.

Couples could leave a home worth 650,000 without it attracting inheritance tax (singles 325,000).This remains unchanged. Above the threshold, the charge is 40% of the value of the property.

But from tomorrow the tax-free allowance will begin to increase:

  • A new tax-free 'main residence' band will be introduced, but it is only valid on a main residence and where the recipient of a home is a direct descendant (classed as children, step-children and grandchildren).

    It is being phased in gradually, starting at 100,000 - meaning a total allowance of 425,000 from 6 April 2017, rising by 25,000 each year until it reaches 175,000 - meaning a total allowance of 500,000 in 2020.

  • So as of 6 April 2017, the maximum that can be passed on tax-free is 850,000 for married couples or those in a civil partnership, 425,000 for others. For singles, this is made up of the existing 325,000, plus the extra 100,000. For couples, when the first one dies their allowance is passed to the survivor, so that 425,000 is doubled to 850,000.

The new inheritance tax allowance will be rolled out from tomorrow

Here's how it will work by April 2020:

  • The tax-free amount will rise to 1 million for couples (made up of 325,000 x two plus 175,000 x two) and 500,000 for singles (made up of 325,000 plus 175,000), as the main residence allowance rises.
  • On properties worth between 1 million and 2 million, inheritance tax will be paid as normal (40%) on the amount above the tax-free amount.
  • On properties worth 2 million or more, homeowners will lose 1 of the 'main residence' allowance for every 2 of value above 2 million. So for a couple, properties worth 2,350,000 or more will get no additional allowance.

Inheritance tax changes to be rolled out from tomorrow - what it means for you
By 2020 each parent will be able to leave 500,000 in property without paying inheritance tax

Tax break not as beneficial on properties owned by single parents

Children or grandchildren where a single parent owns the property won't receive the full effect of these inheritance tax benefits as those who are married or in a civil partnership.

Here, only properties worth up to 500,000 (by April 2020, 425,000 from April 2017) can be passed on completely tax-free as there is only one allowance in play, not the two that couples have.

New rule won't affect those who have downsized their property

Those who downsize now and therefore may have cash once their home is sold, where that money once formed part of the equity in a property, will still be able to pass on the same value of their estate tax-free to their dependents as had they kept a pricier property.

Various assets are subject to inheritance tax

When you die, the Government assesses how much your estate is worth, then deducts your debts from this to give the value of your estate. Your assets include:

  • Cash in the bank
  • Investments
  • Any property or business you own
  • Vehicles
  • Payouts from life insurance policies
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