New care-free attitude to IHT could be misplaced

An increased IHT allowance is giving people a disproportionate sense of their freedom from liability, says a report that estimates one in three wills need to be rewritten.

The additional nil rate band announced in the Summer Budget means that by 2020/21, a married couple could pass on a £1m house to lineal descendants free of tax. But assessment by website Citywire Money says people are mistaken if they think it leaves them worry-free.

Misunderstanding the risk could, the report says, be saddling as many as one in three wills with a nasty surprise.

The issue centres around discretionary trusts, a means by which people pass on assets yet retain control over the beneficiaries. For example, a husband may write the house into a discretionary trust with the aim of ensuring that, on his death, his wife benefits and it later passes to their children rather than a second husband, should she remarry.

However, in such a scenario, the trust becomes the beneficiary of the will rather than the children, even if they are the beneficiary of the trust. But the chancellor’s new rules state that only children, grandchildren or foster or adopted children can be the beneficiary if the nil rate band is to apply.

The report estimates that approximately a third of wills feature the trusts and consequently need to be rewritten.

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