Inheritance Tax: The Family Home Allowance

The Government has made it clear that the special inheritance tax concession for family homes should not be available to people who have no children, this against a backdrop of significant protests.

The "Family Home Allowance" was introduced in the summer budget earlier this year and comes into effect from 6 April 2017. It is intended to provide a mechanism whereby a married couple's joint £650,000 inheritance tax exemption can be extended up to £1m (although the extra allowance  is applicable only to the family home). The proposed changes provide that each spouse will have a separate £175,000 allowance each, being £350,000 combined, on top of their individual £325,000 nil rate bands. Be warned though, the £175,000 is not immediate from April 2017, it's being phased in between then and 2021 and will start at only £100,000 each. It's also worthy of note that this starts to be clawed back where the property in question exceeds £2m in value!

Now for the next sting in the tail as it will only apply where the family home is bequeathed to children and grandchildren (stepchildren and adopted children are included too). Therefore, a couple with no children effectively face up to a £140,000 bill (40% death tax applied to £350,000) above and beyond that which couples with children would pay.

It is interesting to note the use of the word “bequeath” in David Gauke’s comments too, as it may well imply that where one passes away without leaving a Will that specifically leaves the family home to a direct descendant the new allowance could also be refused. Therefore the possibility of dying intestate (without a Will) could adversely affect one’s inheritance tax liability

Dividends, an update...

Following on from my earlier blog on the changes to the taxation of dividends there has been a further update on how those changes are going to apply to all dividend income. HM Treasury confirmed in August via a HM Revenue & Customs factsheet that the £5,000 dividend allowance is actually a zero rate tax band just for dividend income and that it will still form part of the £31,785 basic rate band for income tax purposes, rather than in addition to it as some of us had hoped. HMRC state:

"The Dividend Allowance will not reduce your total income for tax purposes. However, it will mean that you don’t have any tax to pay on the first £5,000 of dividend income you receive. Dividends within your allowance will still count towards your basic or higher rate bands, and may therefore affect the rate of tax that you pay on dividends you receive in excess of the £5,000 allowance."

At present owners of small companies could pay themselves up to £42,385 a year without suffering any income tax (taking into account their personal allowance of £10,500 in 2015/16 as well as the dividend allowance), whereas assuming that the basic rate band and personal allowance remained the same in 2016/17 then the increase in tax would be just over £2,000 as a direct comparison, this is without seeing an increase in their income!

For those extracting in excess of the basic rate band the picture worsens, as currently for every £1,000 extracted as dividend only £250 would have to be paid over to HMRC. From next April with the abolition of the dividend tax credit this will rise to £325. So, for a business owner extracting £100,000 a year from their business the changes to the taxation of dividends will cost a little over £6,300 more in tax than it does currently.

Obviously these are two extremes of looking at how owners of small to medium family companies choose to remunerate themselves, but it is apparent to see that the overall increase in this bracket amounts to a flat 7.5 pence in the pound for any dividends over and above the combined personal and dividend allowances. It is quite easy to see how according to the Government’s estimates, the new dividend tax regime is expected to raise £2.54bn during 2016/17, with smaller, but still significant income flowing to the Treasury in subsequent years!