Do Changes To The Inheritance Tax Limit Mean Changes To Your Will?

Thousands of families in the UK will need to make significant changes to their will or risk missing out on the new allowance for inheritance tax. Many of these people originally set up discretionary trusts in order to have a tax-efficient way to leave property to their children.

Accountants have warned that changes to the inheritance tax limit mean that homes passed on to children through discretionary trusts won’t receive any benefits from the family home allowance, which will be worth up to £350,000 per family from 2020.

How Did Inheritance Tax Work In The Past?

Before 2007, the first person to die out of a couple could leave all assets to the surviving partner without getting stung by inheritance tax. However, when the surviving spouse passed away, they could only use the tax-free allowance for their total estate- meaning that when assets were passed to beneficiaries or their children they faced a tax charge.

In response, people began creating discretionary trusts so the first spouse’s assets would be taken out of the estate when they died. As such, discretionary trusts were widely used in order to minimise the impact of inheritance tax.

Qualifying For The New Home Allowance

The new family home allowance is going to be available to those owning homes from April 2017. By 2020, it will be worth an extra £175,000 per person, which is added to the current universal allowance of £325,000. This means that the new allowance for property owners is £500,000 or £1m for couples.

To qualify for the allowance, the property needs to be inherited by direct descendants. This includes grandchildren, stepchildren, children, and adopted and foster children. Discretionary trusts don’t qualify as the trustees technically take legal ownership of the trust and then have discretion towards which beneficiaries receive the assets, and when.

To sum up, this is definitely a moment where UK residents must check their wills and see if they will qualify for the new allowance.