Making sense of new Inheritance Tax allowance provisions for family homes
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As the new Inheritance Tax allowance provisions regarding family homes will take effect from 6 April, it’s important to consider they will have on existing Wills, Will Trusts, Settlements holding property and estate planning.
The provisions for the new residence nil rate band are complex, but in summary it has been put in place to benefit individuals leaving their residence directly to lineal descendants (children), and will take effect in addition to the existing nil rate band. In this way, from 2020, a married couple will be able to pass on El million between them to their children free from Inheritance Tax.
The new residence nil rate band can only be claimed in full where the deceased’s estate for inheritance tax purposes has a value of £2 million or less. It is available in part above this figure, but for estates exceeding £2.2 million there will be no residence nil rate band available in 2017.
Many people will have existing Wills which pass their property, or a share of their property, into trust as opposed to passing them outright. In most cases, matters can be rearranged so the residence nil rate band can still be claimed.
However, trusts that are currently in existence, such as Will Trusts and Settlements holding property will not be able to be changed after the death of a beneficiary. They should be reviewed now to ensure that subsequent beneficiaries benefit, in particular where the following arrangements exist:
1. Will Trust for Widows/Widowers
The terms of certain Will Trusts include the surviving spouse having the right to live in the matrimonial home, and receive income from the rest of the trust fund. This is common as an asset protection measure, particularly on second marriages.
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Often, a layer of flexibility will exist, so that on the death of the widow/widower, the Trustees can take account of the circumstances of the children before making any distributions from the trust. This means that the property within the Will Trust cannot benefit from the residence nil rate band, as it is not ‘directly inherited’ by lineal descendants.
It may be that the widow/widower has sufficient property interests to make use of the entire residence nil rate band-but if not, it would be wise to change the trusts of the Will Trust during the widow/widower’s lifetime.
2. Debt/charge arrangements
Before 2007 it wasn’t possible to transfer the nil rate band between spouses. Much planning took place to ensure it wasn’t lost whilst also making sure that the widow/widower had the benefit of the joint assets. Some planning involved a charge of the deceased’s nil rate band being placed on the matrimonial home, and subsequent homes in which the widow/widower may live. The value of the property will be reduced by this charge, perhaps to a level below which there is not enough value within the property to set against the residence nil rate band.
In these circumstances it is possible that the charge may be removed from the property and transferred onto an alternative asset, during the widow/widower’s lifetime, whilst not losing the nil rate band from the first death.
3. Old taxplanning arrangements with the matrimonial home
Prior to 2005 it was common for couples to enter into arrangements that took the value of their home outside of inheritance tax, but enabled them to continue living there. A tax was introduced to combat these arrangements and many were unwound completely. However, some aspects were left in place, as tax neutral asset protection measures. This would normally include leaving a share of the home in a settlement for one or both of the couple.
The survivor of the couple may not have sufficient value in the property, in their estate for inheritance tax purposes to ensure that the entire residence nil rate band is utilised, and the terms of the settlement are likely to mean that the lineal descendants will not ‘directly inherit’ the property.
All three circumstances tend to involve a significant degree of technical complexity; if in doubt you should seek legal advice.
For legal advice on wills and probate, please contact Elizabeth Pratt in the Guildford office of Penningtons Manches on 01483 791800 or visit www.penningtons.co.uk.