If you are worried that you may be culpable for more Inheritance Tax (IHT) than you feel you should be paying, then it may be time to rethink your financial approach.
You want to ensure that your descendants do not face any potential surprises in the future when executing your wishes.
Sometimes, circumstances prevent the straightforward inheritance of property from one person to another.
You may have children or grandchildren who are too young to handle the financial pressures that come with sudden home ownership.
In these cases, it may be necessary to utilise a discretionary trust to hold your assets until such a time as your desired descendant can assume control.
Careful planning is required to ensure that your home does not miss out on the residence nil rate band and end up with a larger IHT bill.
What qualifies for the residence nil rate band?
The main determining factor that will influence whether a property qualifies for the residence nil rate band is whether you have lived there.
While it might seem that this would specifically apply to your residence at the time of death, it can refer to a property in which you once resided but still own.
This includes properties that are currently being rented by other people provided you once lived there and retain ownership of the property.
If this holds true for the residence you wish your descendant to inherit, then it may well qualify for the residence nil rate band.
It is worth noting that the person to whom the residence is left will determine the eligibility.
A direct descendant inheriting a residence will allow it to qualify for the residence nil rate band.
While this most commonly refers to one’s children, any relative in lineal descent from you, such as your grandchildren or great grandchildren, are regarded as a direct descendent for this purpose.
Additionally, any step children, foster children, and court appointed guardians may classify as direct descendants.
Will using a discretionary trust prevent qualification?
Given that the residence needs to be left to a direct descendant to qualify for the residence nil rate band, leaving it to a discretionary trust instead may render it ineligible for the residence nil rate band.
However, there may still be a way to ensure that your wishes are carried out without increased financial burden for your descendants.
Provided the residence is appointed to the desired party within two years of your death, it will remain eligible for the residence nil rate band.
Although this does keep the residence qualifying for the residence nil rate band, appointing your residence in this way could leave trustees open to a Capital Gains Tax (CGT) charge at market value.
To prevent this, the appointment should be made before the residue is ascertained as this will ensure the inheritor will acquire the property at probate value and no chargeable gain will be triggered for the trustees.
Be planning carefully, you can mitigate the risk of both IHT and CGT to maximise the inheritance your descendants will receive.
If you want help and guidance in securing your family’s financial future, speak to our team today.