New Inheritance Tax Break: Will You Qualify?

27 Feb 2017

Many of you will have seen the article in the telegraph this weekend about the new inheritance tax changes coming in from April. Billed by the conservatives as a £1,000,000 allowance the new changes are not as simple as that.

From April you will receive an additional £100,000 inheritance tax allowance on your death but this will only be applicable if you leave that amount of value on your house to your direct descendants. If your spouse/civil partner dies before you and does not use their allowance then you can use it in addition to yours. The good news is that direct descendants includes step children and adopted children. If you have no children though, you are going to lose out.

Some people might include a niece or nephew as well as their child as a beneficiary. Leaving your estate so your niece and daughter receive half each means you could lose part of the allowance. A simple re-write of your will leaving your house to your daughter and your investments to your niece could be enough to stop you losing the allowance.

Trusts in wills are not automatically problematic nor is gifting your house into trust during your lifetime but it is important to review any such arrangements to ensure that you will not inadvertently pay more inheritance tax.

Trusts are particularly useful if, between you and your spouse/civil partner your estates are worth more than £2,000,000. If you die with an estate worth more than £2,000,000 the allowance will start to disappear. Leaving the estate of the first spouse/civil partner to die into trust (so the surviving spouse/civil partner can benefit) or directly to descendants could be an effective way of preserving the allowance.

The new allowance comes with other caveats too. Many people prefer to leave their house in trust till their grandchild is 25 rather than allowing their grandchild to inherit aged 5. This could mean that the allowance is lost but you have to weigh up what is more important: paying less tax or avoiding assets passing to a beneficiary too young.

Arrangements in wills can usually be changed within two years of death if all the beneficiaries agree but it does rely on the beneficiaries being adults and having mental capacity. Similarly trusts can usually be wound up within two years of death to allow the allowance to be claimed.

The new allowance is the biggest change to inheritance tax laws since 2007 and it is therefore vital for you to review your arrangements to ensure they are as tax efficient as possible.

A member of the expert private client team at Trethowans would be pleased to help you.