Will a discretionary trust prevent your home from qualifying for the residence nil rate band?
No one wants to pay more Inheritance Tax (IHT) than they have to.
Knowing that there is the residence nil rate band to mitigate some of the liability faced by your descendants may be reassuring.
However, sometimes there are situations where it may not be as simple as writing a person’s name in your Will and letting your estate pass on to them.
If your children or grandchildren are not in a position to handle the financial responsibilities of your estate, such as if they are too young, then it may be necessary to utilise a discretionary trust.
While the residence nil rate band exists to alleviate the sting of IHT, careful planning may be required to ensure your home still qualifies for this relief.
Qualifying for residence nil rate band
The most straightforward way to know whether your home qualifies for the residence nil rate band is to consider whether it is you have lived in that residence.
This most commonly refers to the home which you occupy but can refer to a property you once occupied and continue to own; it may, at present, be rented by you to someone else.
If you have resided in the property then it is possible that it may qualify for the residence nil rate band.
However, the issue arises in terms of who inherits the property.
For a residence to qualify for the residence nil rate band, it should be closely inherited by a direct descendant.
Direct descendants are typically your children but may be those in lineal descent of you such as your grandchildren or great grandchildren.
Similarly, step children, foster children, and court appointed guardians may classify as direct descendants.
Impact of a discretionary trust
As you may be leaving your residence to a discretionary trust and not specifically to a direct descendent, this may cause your residence to fall out of scope for the residence nil rate band.
All is not lost as there is a provision that will allow you to plan accordingly.
Well informed trustees can appoint the property to the desired descendant within two years of your demise.
This will ensure that your residence still qualifies for the residence nil rate band and is inherited by the person whom you wish to receive it.
Keep in mind that this may give rise to a Capital Gains Tax (CGT) charge at market value for the trustees of the settlement.
However, if the appointment is made before the residue is ascertained then the inheritor will be deemed to have acquired the property at probate value and no chargeable gain will be triggered for the trustees.
Being well informed on your options will prevent your family from missing out in the future and ensure you have a greater control over your financial legacy.
These avenues exist to help you mitigate IHT thus maximising the inheritance of your descendants.
Speak to our team today so that we can help you secure your family’s financial future.
