The Daily Telegraph article of 13 September warned that estates where a house is left into a discretionary trust may not be eligible for the new family home inheritance tax allowance to be introduced in 2017. This is because the legislation only allows the new family home allowance to be applied to properties 'directly inherited' by direct descendants (including step-children, adopted children and foster children).
Discretionary trusts will not qualify because the trustees take on legal ownership of the asset (the family home) in the trust and have discretion as to which of the beneficiaries receive which assets, how much each will get and when. The family home is therefore not directly inherited by direct descendants and the family home allowance cannot be applied. The newspaper suggested that testators with discretionary trusts in their wills may therefore need to review their wills to benefit from this new inheritance tax allowance.
Commentary suggests that solicitors are generally of the view that there is no need to panic. Where a Will contains a discretionary trust including the family home, provided that the family home is transferred out of the trust into qualifying trusts or absolutely to a direct descendant who is a qualifying beneficiary within two years of the date of death, then they would benefit from ‘reading back’ under s.144 of the Inheritance Tax Act (IHTA), meaning the Will would be treated as if the family home was directly inherited. As long as there is no indication that s. 144 IHTA will be restricted (and, at the moment, there isn't) then the discretionary trust will allow flexibility whilst still giving the option to use the family home allowance and may remain in the will, unless it is clear that a trust is of no use. Some clients will still see value of their Will containing such discretionary trusts e.g. for protection of children from divorce, or business creditors, or perhaps for IHT planning for the future generations.
Certain types of trust do qualify for the purposes of claiming the family home allowance and include interest in possession trusts (IPPs), disabled persons trusts and IPPs, bereaved minors trusts and 18-30 Trusts.
Wills should be reviewed for their contents at regular intervals as people’s circumstances and laws change. It is worth noting the Finance Bill in 2016 is expected to clarify the application of this allowance to those people downsizing to a less valuable residence. There may well also be amendments if the government reviews deeds of variation under s.142 IHTA. For many people based on the current situation and undertstanding there may be no need to make changes to wills, but this is an area that may well see some more changes to legislation before this allowance comes into effect.
For more information about the Family home allowance or to find out more about how Wealth Protection team can help you please contact Paul Lowery, [email protected] or 0118 952 7227 or Joanna Staerck, [email protected].
Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.