From 2017, the government will phase in a new £175,000 allowance which will sit on top of the existing £325,000 threshold, fixed until the end of 2020-21.
Both allowances can be transferred a spouse or partner, and those who choose to downsize will not lose any of the allowance from the property they used to own.
However Osborne said he will taper the relief away for estates worth more than £2 million.
He added that the cut in inheritance tax will be more than paid for by changes set out to the pensions tax relief given to the highest earners. From next year their Annual Allowance will be tapered away to a minimum of £10,000.
Speaking, George Osborne said:
"The wish to pass something on to your children is about the most basic, human and natural aspiration there is. Inheritance tax was designed to be paid by the very rich.
"Yet today there are more families pulled into the inheritance tax net than ever before – and the number is set to double over the next five years. It’s not fair and we will act."
Andy Cumming, Head of Advice at Close Brothers Asset Management, said:
“This Budget represented one step forwards and two steps back. Inheritance tax has been crying out for reform for years, and Osborne’s allowance for passing on family homes marks a leap and a bound in the right direction. Since the threshold was last changed in 2009, house prices have risen by 44%, meaning an increasing number of individuals have become liable, simply through virtue of being long-term occupants of their family home.
“However, paying for the change through cutting pension tax relief to high earners runs contrary to the spirit of the recent pensions reforms. We need to be encouraging greater pension saving across the workforce, and limiting the amount one section can set aside will not help build a nation of savers. The shrinking lifetime allowance has already penalised long-term pension saving, and this move compounds the policy error.”
Andrea Rozario, Chief Corporate Officer at Bower Retirement Services added:
“The £1 million inheritance tax threshold will end a lot of unnecessary confusion about retirement planning with people focusing on beating IHT at the expense of their own comfort in retirement.
“Homeowners who are asset rich but cash poor should be concentrating on how best to ensure they maximise their income in retirement and property wealth should be part of the solution. Our advisers’ experience, is that increasingly customers are less concerned about leaving an inheritance as very often their children are more concerned with the quality of life of their parents in their remaining years rather than their own possible inheritance.
“The furore on IHT is slightly out of proportion – around one in 10 estates currently pay the tax which is not insignificant but is not the biggest issue in retirement. There is concern that the new threshold will encourage people to stay in their homes in order to ensure as big an inheritance as possible. That will not help the housing crisis in the country and nor is it necessarily the best use of their assets. Bigger houses need a lot of maintenance and funding that will be challenging from pension income alone.”
