In tax year April 2016 the government’s receipts of Inheritance Tax (IHT) leaped to £4.66bn. This is a 22 per cent increase on the previous year and as house prices continue to rise, more and more family estates are becoming liable for the tax (a 40% tax payable on the portion of a person’s estate above the Nil Rate Band, which is currently £325,000).
To reduce the IHT burden on people who may wish to pass their family home to their direct descendants (children, stepchildren, adopted children, grandchildren or foster children), the government is phasing in a new top-up allowance – the Residence Nil Rate Band (RNRB) – from April 2017.
This will allow some estates to benefit from an additional tax-free allowance of up to £175k per individual (£350k per couple) by 2020/21. However, if your current will creates a discretionary trust as a tax-efficient way to leave your property to your children, the new top-up allowance may not apply to you.
Currently, when the first spouse dies, all their assets can be passed to the second spouse tax free and their Nil Rate Band (NRB) allowance of £325k can be transferred to the second spouse. This means that when the second spouse dies, there is a total NRB of £650k. In other words, no Inheritance Tax is payable on the first £650k of the second spouse’s estate.
Prior to October 2007, it was not possible to transfer the NRB allowance. Therefore, many people set up planning within their wills in order to ensure that they benefit from both NRB allowances. This involves transferring the assets (up to the NRB) of the first spouse to die into a discretionary trust so that, for Inheritance Tax purposes, these will not be included in the estate of the second spouse when they die.
If you have arranged for your property or qualifying assets to pass to your children in this way, your estate will not qualify for the new RNRB. This is because these assets are not seen as passing directly to your beneficiaries – one of the eligibility criteria for the new RNRB.
What you can do
The first step is to review your will in light of the new RNRB and consider your reasons for setting up the discretionary trust.
For example, is the purpose of your trust to ensure that your assets, including property, will be passed on tax-efficiently or is it to ensure a level of protection and control over the assets, or a combination both? Are these reasons still valid or have your priorities or circumstances changed?
A qualified adviser can help you clarify your requirements and understand your options, including whether a discretionary trust is still the best option for you, so that you have a Will that continues to meet all your needs.
For more information contact us for a copy of our RNRB fact sheet.