By Stuart Maggs
Howes Percival
FOR many years, a married couple has only really needed to start worrying about inheritance tax if they had assets of more than £650,000. You may have seen announcements of new rules, suggesting this limit is increasing to £1 million.
The easy thing would have been to increase everyone’s nil rate bands to achieve this aim, perhaps withdrawing the relief for very high value estates to pay for it. Instead a series of hugely complicated rules have been brought in which will need to be met to qualify for the additional exemption.
In very broad terms, your home must be directly inherited by your children. If this happens, not only the £650,000, but also the value of the house capped at £350,000 will also be exempt from inheritance tax.
So for a married couple with a house worth £300,000 and investments of £700,000, the house would be exempt as would £650,000 of the investments.
Unfortunately, this relief is not always available. Firstly it falls away if a person’s estate at death is worth more than £2 million. Secondly the home (or proceeds of its sale) must pass directly to children or grandchildren.
Some wills drafted before 2007 included provisions for ‘nil rate band trusts’, a common tool to maximise inheritance tax reliefs. If these trusts remain in place, there is a risk that on death the property will not pass directly to the children, but will instead be locked up in the trust.
Additionally, many people may have discretionary wills in place, a very flexible arrangement for people who are either undecided what should happen after their deaths, or who want to be able to change their minds without changing their wills. Following your death your assets to pass to trustees who can distribute them in accordance with your wishes.
In these arrangements, the home will not pass directly to the children or grandchildren, and so the relief will be denied. Leaving a will like this in place could cost your heirs up to £140,000 in extra tax charges.
The message is therefore a common one – you should not only ensure you have a will, but also that it is up to date, achieves what you want and is as tax-efficient as possible.
