Pocket money... how downsizing relief can cut IHT

⬤ There’s a little-known tax break that could let you use a former home to reduce your inheritance tax (IHT) liability even after you’ve sold it, says tax expert Mike Warburton in The Telegraph. Downsizing relief lets you offset the value of a previous home against IHT, so long as your total estate is not valued at more than £2.7m.

Under the current IHT rules, everybody has a nil-rate band of £325,000 on their estate. Any unused portion of this relief can be transferred to a surviving spouse within two years of their death. They also get an additional £175,000 residence nil-rate band (RNRB) when they pass their home onto direct descendants, and this can also be transferred to a surviving spouse. Thus a couple can have combined relief of £1m, so long as their house is worth more than £350,000 at death.

Many people will sell their property in later life to move to a smaller one or a care home. If they owned the property after 7 July 2015, its value can be used for RNRB purposes. Relief must be claimed within two years of death and the taxman will require evidence, so “keep your intended executors fully informed well in advance and give them all relevant documents”.

⬤ Soaring interest rates will cost mortgage-payers more than £12bn in extra payments over the course of this cycle, says The Guardian. The Bank of England base rate has risen from 0.1% to 4.5% over the past 18 months, but since around half of the 7.5 million UK households with mortgages are still on fixed-rate deals, the impact of this has been limited.

The hikes so far have meant an extra £4.3bn in interest for households whose fixed rates have expired or who were already on variable rates, reckons the Resolution Foundation, a think tank. However, that will increase by a further £8bn over the next few years, with around £5bn of that taking effect over the next year.

⬤ Investec has boosted the interest rate on its 90-Day Notice Saver account, making it an attractive half-way house between easy-access and fixedterm deals, says This is Money. The bank has increased the rate by 0.54 percentage points to 4.25%, compared with 5% from the best one-year fix (from Allica Bank) and around 3.5% from several easy-ish access accounts. Investec’s account is available online only and the 4.25% rate applies to balances from £5,000 to £250,000.