The last summer budget saw the Chancellor deliver his promise to increase the Inheritance Tax (IHT) threshold to £1m. However, it is not quite what it seems.

Many people have assumed that there is now simply a full £1m exemption per couple but the reality is more complicated than that. Under the new rules, the nil rate band remains at £325,000 per person, as it has since 2009. However, a family home allowance (FHA) of £175,000 is being phased in so that by 2020/21 the full rate will be applicable, making a potential allowance of £500,000 per individual or £1m per married couple.

The FHA is being introduced in April 2017 at a rate of £100,000, and this will increase by £25,000 per annum until it reaches the full £175,000 in 2020/21.

However, this additional allowance can only be set against an individual’s main residence and so will not be available in full if the family home is worth less than £350,000 at the time of the second death. At the other end of the spectrum, the FHA will be progressively withdrawn for estates worth more than £2m. Estates that are worth more than £2m will lose £1 for every £2 over the £2m threshold.

There are further issues that many people are not aware of. For example, to qualify for the family home allowance, the property must have at one time been the main home and must be left to one or more direct descendants. This includes children, stepchildren and grandchildren, as well as adopted and foster children, but not other relatives such as a nephews and nieces.

It also means that the many families who have set up “discretionary trusts” in order to leave property to children in a tax-efficient manner could miss out, as to qualify for the family home allowance the property must be “directly inherited” by direct descendants. With discretionary trusts, the trustees take on legal ownership of the assets in the trust and have discretion around which of the beneficiaries receive which assets, how much each will get and when. For those with discretionary trusts in place, they may need to make significant changes to their wills, in order to benefit.

As well as the above, there are other issues that you may need to be aware of, so for help with your estate planning, contact Kellands.

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