Leading County Durham law firm Latimer Hinks is warning families that their children and loved ones could lose out if they don’t make urgent changes to their will.
Thousands of people set up what are known as discretionary trusts in a bid to stop their loved ones from having to pay extra Inheritance Tax (IHT).
But, unless they now make significant changes to their will, they could miss out on the new family home allowance (FHA) element of the Government’s IHT allowance.
Elizabeth Armstrong of Latimer Hinks said: “Discretionary Trusts made a lot of sense before Chancellor George Osborne announced changes to IHT, and they do still have their place and a valuable role to play in tax planning. But many families face missing out on valuable allowances if they fail to change their wills. That could mean they pass on large chunks of their estate to the taxman.”
Before 2007, the first of a married couple to die was able to leave all of their assets to the survivor without having to pay any IHT. However, when the surviving spouse died, they were only able to use one i.e. their own tax-free allowance against the whole estate, meaning assets passing to children or loved ones following the second death could face hefty tax bills.
To avoid this situation, many families set up discretionary trusts, where the first spouse’s tax free assets were effectively put into trust on the first death.
Since 2007, married couples and civil partners have been able to transfer the tax free allowance of the first to die (the unused nil-rate band) to the surviving spouse’s estate to secure two tax-free allowances of up to £650,000 upon the second death.
That £650,000 tax free allowance is set to improve further with the new FHA, making it possible for married couples dying in 2020/21 tax year to leave a total of £1m by with no IHT due.
But, to qualify for the extra £175,000 FHA the family home must be directly inherited by direct descendants. Gifts to discretionary trusts do not qualify. Whilst Discretionary trusts are still very useful and effective in many circumstances eg. Second marriages, where there are young children, the FHA changes have made discretionary trusts less relevant for many.
Elizabeth Armstrong added: “Legislation is changing all the time so we’d urge everyone to review their will to make sure they leave as much as possible of their hard-earned assets to the family and loved ones they want to benefit.”
The new warning comes on the back of a parliamentary petition launched by Latimer Hinks urging changes to IHT rules.
To benefit from the new FHA, your family home must pass down to direct descendants, including children, grandchildren and stepchildren. This means childless individuals and siblings are not eligible for the same tax benefits as those with children.
Latimer Hinks has written an open letter to George Osborne, and launched a petition.https://petition.parliament.uk/petitions/105736