Q: When my father made his Will the house was written into a discretionary trust so that if he died Mum would be able to live there until she died but it would pass on to me and my two brothers on her death. The thinking was that if Mum remarried her new spouse would not be able to benefit from the house, which is worth around £800k. My father was delighted when he heard about the £1 million IHT allowance announced in the summer. I, however, am concerned about what implications the changes may have on the discretionary trust. Please could you clarify the situation?
A: As you rightly say, discretionary trusts can be used to control who benefits from the assets of a Will. Changing social demographics and rising property values have made them more popular in the last decade or so.
The additional nil rate band for a main residence passing to ‘lineal descendants’, introduced by chancellor George Osborne in his Summer Budget, means that by 2020/21 a married couple or those in a civil partnership will be able to pass on a £1 million house free of inheritance tax. However, where property is written into a discretionary trust it is the trust that is the beneficiary of the Will, so that even if the children are the beneficiaries of the trust, the uplift does not apply. Another anomaly of the new legislation is that if a property is left to a descendant and someone else, for example a son and the son’s wife, then the nil rate band applies only to the percentage of the asset that benefits the son.
It is thought that one third of Wills in the UK could miss out on the £1 million IHT allowance unless they are rewritten, so it would be advisable for your father to seek legal advice from a lawyer.