The Telegraph has reported this week that thousands of families may need to review their wills if they want to benefit for the Governments new inheritance tax allowance.
It is stated that homes left to children through a discretionary trust will not benefit from the Family Home Allowance worth up to £350,000 per couple from 2020 because assets do not pass directly to children.
So why were/are discretionary trusts so popular?
Prior to October 2007, the first of a couple to die could leave all of their assets to their surviving spouse completely free of IHT. But when the surviving spouse died they could only use their own tax free allowance, or nil rate band, for the total estate. This meant that when assets were passed to children or other beneficiaries on second death many faced a tax charge. To avoid this, people created discretionary trusts so that the first spouses assets were taken out of the estate for inheritance tax purposes on their death. Thus each spouses allowance was utilised.
Since October 2007, married couples and civil partners could transfer any of their unused nil-rate band to their surviving spouse creating a tax free allowance of up to £650,000 on second death. This made discretionary trusts slightly less attractive but still utilised to ensure assets are left to intended beneficiaries such as children from a first marriage for example.
For those clients who have a discretionary trust in their will, it could be worth undertaking a review. The new family home allowance will be available to people who own a home from April 2017 and will ultimately be worth £175,000 per person in 2020. To qualify for the family home allowance the property must be ‘directly inherited’ by direct descendants. This includes children, stepchildren, adopted and foster children and grandchildren.
Discretionary trusts may not qualify because the trustees take on legal ownership of the asset in the trust and have discretion around which of the beneficiaries will receive which assets, how much each will get and when.
So which trusts will qualify?
The current consensus is that under the trusts below, any property and assets are deemed to pass directly to the beneficiaries who are fully entitled to use the property or take any income from it. The current view is that the existence of the trust is effectively ignored for tax purposes.
- Interest In Possession Trusts i.e Property Protective Trusts, Flexible Life Interest Trusts
- Disabled Persons Trust
- Bereaved Minors Trust
- Childrens Trusts
What is clear, much more detail and practical application of any new legislation inevitably takes time and in this case, the family home allowance is no exception.
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Source: The Telegraph