Many people who previously set up discretionary trusts to mitigate inheritance tax liabilities may need to act in order to benefit from forthcoming rule changes, according to experts.
Designed for married couples and civil partners who own a property, the main residence nil-rate band (NRB) is introduced this month, raising the current band by an initial £100,000 before rising incrementally to £175,000 by April 2020.
When added to the single NRB of £325,000, this will enable joint assets up to £1m to be free from inheritance tax (IHT).
However, experts have warned that any assets held in discretionary trusts fall outside the new rules, as the allowance is only available to direct descendants whereas trust assets are owned and controlled by trustees.
Discretionary will trusts were originally a popular method of ensuring married couples could both use individual NRBs. But in 2007, then chancellor Alistair Darling announced a deceased NRB could transfer to the surviving spouse, negating the effectiveness of many previously established discretionary trusts. Regardless, many people retained these trusts and could be stung by the new rules.
Tim Fullerlove, partner at private client law firm Wilsons, explained that although discretionary trusts prevent the new allowance from being accessed, a deed of variation enacted with two years of death would allow a trust to be broken and assets subsequently gifted to the descendants.
Mr Fullerlove claimed that despite these concerns, discretionary trusts still form a vital component for estate planning to ensure controlled distribution of assets. He said: “Many people prefer to leave assets to their descendants only once they are financially experienced enough – often specifying an age at which their descendants should inherit – rather than passing the assets to them outright.”
Moore Blatch partner Carla Brown added: “The new IHT allowances mean previously prudent IHT planning measures such as establishing a discretionary trust will need to be carefully considered and may now need changing.”