IHT rule change clash flagged for advisers

IHT rule change clash flagged for advisers

Advisers have been warned to scrutinise clients’ will arrangements or risk losing their loved ones incoming extra interitance tax allowances because they have relied on discretionary trusts.

With effect from April 2017, the government is gradually introducing a family home allowance, so homeowners can pass on property or some of its value to the next generation without paying inheritance tax.

Also known as a main residence nil-rate band, it will eventually be worth an additional £175,000 per person by 2020/21.

Article continues after advert

It means married couples and civil partners can pass on assets worth up to £1m including the main residence to their direct descendants, without paying any UK inheritance tax.

But Craig Hughes, a private client tax director at accountancy firm Menzies, warned while many will be able to leave more of their assets to their descendants free from any inheritance tax, some could miss out due to the inclusion of a ‘discretionary trust’ clause in their will.

“Historically, many married couples chose to include a clause allowing the creation of a discretionary trust for their children or grandchildren upon first death to use their IHT nil-rate band, otherwise it was lost,” Mr Hughes said.

“However, when the law changed in 2007 allowing married couples and civil partners to transfer their IHT nil-rate band allowance to the surviving spouse or partner, this clause was rendered redundant in most cases.”

To avoid being caught out, he suggested advisers contact clients to review their wills and ensure they are not using such trusts in a way that could disadvantage them from an IHT planning perspective.

In most cases, a simple amendment is usually enough to solve the problem and allow couples to pass on more of their wealth tax-free.

But depending on the personal objectives of the individuals concerned, a discretionary trust may still be the best option, Mr Hughes said.

“The family home allowance will be gradually lost if the assets being passed are valued at more than £2m, so a person who wishes to create a discretionary trust under these circumstances would be no worse off,” he said.

“For the adviser, the introduction of the new family home allowance is a classic door opener; another opportunity to remind clients about the need to review their IHT planning regularly,” he said.

IFAs should be aware other trusts are unlikely to raise similar inheritance tax implications, Mr Hughes said.

For example, bare trust’ will not be excluded from the new allowance as long as they are held for direct descendants, while interest in possession trusts, which could be created on first death, should also not be excluded from the main residence nil rate band.

David Trenner, technical director at Intelligent Pensions, called the family home allowance “another of George Osborne’s gimmicks” aimed at being able to say he had reached the £1m threshold promised in the manifesto of 2010.

“It will only benefit people with a high concentration of their estate in their home, because it starts being withdrawn once the estate exceeds £2m. He would have been better to increase the allowance to £500,000 but politically he could not afford to do so.”