New Inheritance Tax limits, what’s changed?
The summer Budget introduced a new Inheritance Tax allowance, and we are now seeing how this will work in practice.
The new family home allowance, which introduces a nil rate band, will be available to people who own a home from April 2017 and will be phased in over a period of four years so that for deaths in 2017 to 2018 the maximum additional amount will be set at £100,000, increasing to £125,000 for 2018 to 2019, £150,000 for 2019 to 2020 and to £175,000 for 2020 to 2021.
There is the potential that estates where a house is left into a discretionary trust may not be eligible for the new initiative as the nil rate band is restricted to properties ‘directly inherited’ by direct descendants. Testators with discretionary trusts may now need to review their wills to benefit from the new allowance.
Discretionary trusts – a common form of trust – have been widely used in the past to protect beneficiaries and, in some cases, to mitigate inheritance tax (IHT). Under the new rules, homes left to children through a discretionary trust may not benefit from the allowance if the structuring of the will trust or the later transfer is not set up correctly.
It will be interesting to see how the implementation of the tax allowance works in practice and the impact this will have tax planning.