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Don't lose out on the new IHT allowance


Did you know...
Your family could lose the benefit of the recent increase in the Inheritance Tax Residence Nil Rate Band if you are not going to leave your property direct to your children or grandchildren when you die. If your home or a share of it is due to pass into a trust on your death the right to claim Residence Nil Rate Band could be lost.
 
Discretionary Trust Despair?
 
If you have included a Discretionary Trust in your Will or if you’ve set up a separate Property Trust as part of your estate planning, recent newspaper articles might be giving you concern because they have suggested families won’t be able to benefit from the new Residence Nil Rate Band (“RNRB”) of £125,000 per person.

So, should you be scrapping your Discretionary Trusts?
 
HOLD ON! 
If we were to believe everything that’s been written in the last few months about the Residence Nil Rate Band allowance, we would assume that the only way to benefit from the RNRB is to leave the family home (or a share of it) outright to “lineal descendants”, i.e. children or grandchildren.

It’s been suggested that anyone leaving their estate to Discretionary Trusts, for example, will not satisfy the ‘lineal descendant’ requirement and therefore will lose out on this important new IHT relief.

Do you have to lose out on Discretionary Trust protection?
It’s important to remember there are a variety of reasons why Discretionary Trusts are so widely used in Wills. Many people are attracted by the protection they offer.
If you leave an asset outright to a child or grandchild rather than via a Discretionary Trust you lose the protective benefit of a trust arrangement.
Think what would happen if your child or grandchild gets into relationship difficulties such as a divorce or financial difficulties such as bankruptcy after your death?
Or what if your child or grandchild requires long-term care or is vulnerable to financial manipulation?
These are all situations that Discretionary Trusts can protect against very effectively.
 
Can you ‘have your ‘tax’ cake and eat it?
How can you retain the flexibility and protection that you get from a Discretionary Trust and ensure that your family doesn’t miss out on the RNRB?
The answer lies in the very flexible nature of Discretionary Trusts. The recent news reports about the RNRB have rarely mentioned that there is legislation that can help Trustees of a Discretionary Trust to preserve the benefit of the RNRB.

Trustees of a Discretionary Trust can make use of a less well-known section of the Inheritance Tax Act 1984
Trustees of a Discretionary Trust have the power to choose a lineal descendant to inherit a share of the property within two years of a death.
HMRC has confirmed that from March 2017 the RNRB can apply where the property transfers to a Trust provided there is a ‘Qualifying Life Interest’ (also referred to as an ‘Interest in Possession’). In simpler terms this means the Trustees give a beneficiary a life interest in the property. The deceased’s estate then gets the benefit of the RNRB and yet the property still remains in the Trust.

The Trustees have 2 years to pick the child or grandchild to have the ‘Qualifying Life Interest’. That’s great, problem solved …

But what if the Trustees forget?
Most people choose family members or friends to be their Trustees. They're not necessarily going to know they need to take action within the 2 years following the property owner’s death.
 
What about a Trust that
  1. gives the Trustees the power to choose the person to receive the Qualifying Life Interest at the date of death, and
  2. also makes sure that if the Trustees forget to do so, RNRB can still be available REGARDLESS.
Flexible Family Trust
 
Here’s a solution – a Flexible Family Trust.
A Trust that gives the Trustees power within two years of death to choose a 'lineal descendant’ and the security that if the Trustees delay or do nothing, the Trust defaults to give a Qualifying Interest to a lineal descendant, ensuring that the RNRB relief is never lost. 

What if you want the chosen beneficiary to have access to capital as well as income from the trust? That's where the flexible nature of the trust comes in handy.

Does this mean completely re-writing your Will?
Not necessarily. By making a few amendments to your Will you can include the Flexible Family Trust provisions in your Will and secure the benefit of the extra Residence Nil Rate Band allowance. That's an extra IHT saving of £125,000 (tax year 2018/19) per person!

Call us today to book a Will Trust Review - 0115 7722129 
 
 

 

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