What you need to know
From April this year some homeowners will be entitle to an additional £100,000 free of Inheritance Tax. As the allowance is transferable between spouses and Civil Partners, this can effectively mean that couples have an allowance £200,000. When added to existing allowances they could leave assets worth up to £850,000 free of Inheritance Tax. This allowance is scheduled to go up each year so that by 2021 couples will be able to achieve a maximum of £1 million free of inheritance tax.
There are certain rules – for example, the ‘extra’ allowance in 2021 of £175,000 each must come from equity in a property. The property itself must also be left to lineal descendants, which basically means children (or their spouses), stepchildren, fostered children and grandchildren, but not children of an unmarried partner.
With Inheritance Tax payable at 40% on any assets over the allowance, this is undoubtedly good news for some. However, there are some exceptions:
- Where estates on death are worth over £2million the allowance will be reduced or lost. Importantly, the £2million figure will include all assets even if they qualify for relief from Inheritance Tax, such as businesses.
- Assets left into certain types of trusts will not qualify as the property is not being left directly to lineal descendant. Bare trusts, trusted for disable people and trusts for bereaved children will qualify for the new allowance.
What can you do?
This has led to some panic, as many thousands of people have set up trusts in their Wills for a variety of reasons; but most modern discretionary trusts will include Powers of Appointment so that the trustees can basically change the provisions of the trust after someone’s death to ensure that the trust assets can qualify for the new allowance. There are also provisions with the Inheritance Tax Act 1984 to allow changes to Wills after deaths within two years, so we shouldn’t necessarily be panicking just yet.
What worries me slightly is that usually these changes need to be made within two years of a death, and when laypeople are acting as executors they might not be aware of this. That is why we are encouraging anybody with a trust in their Will to review it. It could well be that it could still qualify for the new allowances, or that the Will could be redrafted to make sure that it does.
As always, everyone is different and the above advice is only of a general nature. To be certain of your own situation, make sure you get your will reviewed.
Give us a call on 01473 358195 for an initial discussion in the comfort of your own home with no obligation or CLICK HERE for more information.
Stephen Wilkes
Head of Estate Planning
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