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27 April 2015

The potential ups and downs of IHT

Thanks to the recent Budget and a high profile court case, inheritance tax has been in the news. With the general election just days away as Insight went to press, it’s extremely likely that some IHT changes will be on the way.

Private client partner Craig Williams says no matter what future governments have in store, working with a solicitor is the only real way to ensure your affairs are handled to the letter of the law.

If the Conservatives are successful, Chancellor George Osborne has already announced that from April 2017, parents would each be offered a further £175,000 "family home allowance" to enable them to pass property on to children tax-free after their death.

This could be added to the existing £325,000 inheritance tax threshold, bringing the total transferable tax-free allowance from both parents in a married couple or civil partnership to £1m. The proposed additional allowance would only apply to a principal private residence and to direct descendants of the deceased.

The Conservatives say the full amount would be transferable even if one spouse had died before the policy came into effect, therefore benefitting existing widows and widowers.  Be warned however, that the plans include tapering off the tax relief for higher value estates over £2 million.

While these proposals may fall short of what many were hoping for in terms of a much higher overall IHT allowance, the reality is that the Treasury needs revenue from IHT.

At the time of writing, the position was uncertain, but one new move that the Chancellor did announce in his Budget is a review of Deeds of Variation (DoV), in order to crack down on potential inheritance tax avoidance.

The reality is that a DoV – a way of changing a deceased person’s will – has always been a concession and personally, I don’t believe that using a DoV usually results in less tax being paid, at least not in the short term.

Classically it is most often used when an elderly parent leaves an estate to “children” in their 50s and 60s who already have wealth of their own. A DoV has enabled them to pass the estate through to the next generation without having to engage the rule by which they must survive for seven years.

If the review does come down in the favour of change, then the key implication will be the need to firstly make a valid will, review it regularly and consider building much more flexibility into your will at the time you make it.

Fortunately there are provisions available to achieve this, for example by building in discretionary trusts of residue which, at the discretion of the trustees, allows assets to be passed straight to grandchildren if the children don’t need the money.  The key is to take professional legal advice to ensure the most efficient outcome is achieved.

To speak with a lawyer in our wills, trusts and probate team call 01753 279030 or email your enquiry to privateclient@bpcollins.co.uk.

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Phone: +44 (0) 1753 889995

Email: enquiries@bpcollins.co.uk

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