Families set to lose death duty break
Hundreds of thousands of people who established trusts as a way of limiting inheritance tax liabilities will have to hurriedly re-arrange their affairs – or risk losing out on a valuable new tax perk.
Lawyers warn there is a “ticking time bomb” which could see families miss out the new “family home allowance” which could save thousands of pounds in death duties.
Until recently well-off families were encouraged by financial advisers and solicitors to use “discretionary trusts” to pass on property to their children.
But from 6 April this year, the new “main resident nil-rate band” for inheritance tax – better known as the family home allowance – takes effect, and trusts are explicitly excluded.
The aim of the policy, described in full detail on Page 3, is to give an additional IHT allowance on top of the usual £325,000 per person. By the time the changes are fully rolled out in the 2020-2021 tax year, a couple will be able to pass on a property worth £1m free of tax.
However, Gary Kiely, a wills and trust specialist at law firm Blaser Mills, estimated hundreds of thousands of people could miss out on the expanded allowance unless they dismantle trust arrangements.
It is difficult to know exactly how many wills need to be rewritten because there is not a central registry of trusts and the contents of wills are private. However, around 16 million adults hold a will and in the past – particularly before 2007, when IHT rules changed – people establishing wills with the help of a solicitor or adviser are likely to have included a trust.
He said: “It needs to be stressed to people that if there’s a discretionary trust sitting there and the first spouse dies, the children need to do something.”
The allowance is only granted where a property is inherited by “direct descendants”, including children, stepchildren, adopted and foster children and grandchildren. Discretionary trusts are excluded because here the assets are technically owned by the trust, and controlled by the trustees, not the beneficiaries.
The trust itself does not exist until triggered by the death of the second spouse, so there is nothing to unwind – but the order to establish a trust must be removed.
Beneficiaries of a will have two years from the death of the second parent to disband the trust, using a “deed of variation” to ensure they can make use of the family home allowance. All parties have to agree to this – any beneficiaries as well as the
Your precious family home
page 3 trustees, often close friends or neighbours, chosen by the person who originally wrote the trust into their will.
A “variation” takes place as if the deceased had made changes to their will themselves. If two years pass before a variation is undertaken, the original will is adhered to and the allowance lost for good.
Mr Kiely warned a variation can only be used if none of the beneficiaries are minors
A decade ago discretionary trusts were incredibly popular because they allowed a couple to combine both their IHT allowances which at the time could not be transferred as they can today.
Without using a trust, the tax-free allowance from the first of a couple to die would die with them. On the second death only a single allowance remained.
But in October 2007 then chancellor Alistair Darling announced married couples and civil partners could transfer their unused allowance to a surviving spouse. The change took immediate effect and, for many, rendered discretionary trusts irrelevant.
Yet they remained popular because they allow greater control over what happens to assets after death, and are particularly useful where there are children from more than one marriage.
Many well-off families risk missing out on the new inheritance tax break which will apply from April, warns Sam Brodbeck
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While gender inequality in pension and pay is well documented among older generations of workers, new research now suggests the problem is persisting for the “millennials” – those who are today in their 20s and early 30s.
Insurer and pension provider Zurich found women across all age groups receive less in employer pension contributions than men, setting them up for a far poorer