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New potential Inheritance Tax planning pitfall

New potential Inheritance Tax planning pitfall
May 17, 2017 Lucy Grimsley

A recent change in Inheritance Tax legislation could adversely affect hundreds of thousands of people whose current Wills contain a Discretionary Trust. Discretionary Trusts were used historically by many clients as a way of limiting the Inheritance Tax liability due on their death; however the recent legislation changes could leave many potentially losing out on a valuable new Inheritance Tax incentive if action is not taken.

The change in the law could see many families miss out on the new Residence Nil Rate Band (‘RNRB’) allowance which came into force on 6th April this year.  The RNRB gives everyone an additional Inheritance Tax allowance, on top of the usual £325,000.00, if certain criteria are met.  With the aim that once the new policy has been fully implemented from 6th April 2020 a married couple could then be able to pass on assets worth £1,000,000 free of Inheritance Tax.

One of the main criteria for being eligible for the new RNRB is that your property is inherited by “direct descendants”, under the terms of your Will. The definition of ‘‘direct descendants’’ does not include property, or a share of property, left to a Discretionary Trust.  This is because the property will then be technically controlled by Trustees and not inherited directly by the Discretionary Trust’s beneficiaries.

It is therefore essential that anyone with a Discretionary Trust in their Will seeks expert professional advice on whether the same should be removed or retained.  There are often a number of factors to consider when thinking of removing a Discretionary Trust from a Will, with Inheritance Tax being a major concern, however all implications should be considered to ensure that removal of the Discretionary Trust does not cause other issues after death.

It is also vital that Executors dealing with a Will of someone who has passed away after 6th April 2017, which contains a Discretionary Trust also seek expert advice as the new legislation does allow the possibility of removing a Discretionary Trust, if all interested parties under the Will agree within two years after death.

Richard Neea, Head of Wills, Tax and Probate at Enoch Evans LLP comments that, ‘‘The introduction of the new Residence Nil Rate Band has allowed people the opportunity to pass more wealth on to their loved ones Inheritance Tax free, which is more than welcome.  Unfortunately, it has made the preparation of Wills and the advice that goes into Will making more complex, particularly surrounding the area of Discretionary Trusts.  Discretionary Trusts are still extremely useful in estate planning and careful consideration of an individual’s unique circumstances, must be taken before deciding to take a Discretionary Trust out of an existing Will, or place one into a new Will.  The ability to vary the terms of a Will and remove a Trust after death does give some comfort, in that adverse Inheritance Tax consequences can be reversed, however as this is more costly and requires the approval of all interested parties under the Will, I would recommend that all clients with a Discretionary Trust Will seek independent, professional advice as soon as possible.’’

The Wills, Tax and Probate team at Enoch Evans LLP have a wealth of experience in preparing Wills and advising clients on reducing the Inheritance Tax that will be due on death.  The Department has also recently been reaccredited by the Law Society for membership of its elite Wills and Inheritance Quality Scheme (‘WIQS’).  If you wish to discuss the above in more detail, the making of a Will or undertake a review of your affairs, please do not hesitate to get in touch with a member of our Wills, Tax and Probate team who will be more than happy to assist you.

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