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Catch up with the latest press releases from LV=

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Over 55s risk falling prey to the inheritance ‘sibling tax trap’

Press release: 19/03/2017

  • Increased Inheritance Tax (IHT) allowance on family home only available to those handing estate to direct descendants, but one in 10 family homes are given to siblings
  • Missing out could cost up to £70,000 in additional tax for an individual or £140,000 for a couple
  • Even those ‘in the know’ about new rules don’t realise this tax free allowance can be applied to cash proceeds from downsizing or a sale to fund care costs

More than 1.7million over 55s1 could miss out on the upcoming increased nil-rate inheritance tax band (the Family Home Allowance) because they've assigned their sibling to inherit their family home and not a direct descendant, according to the latest research from LV= Legal Services.

The research by the insurer’s independent legal service shows that one in 10 over 55s (10%) have written their will to pass their family home to their siblings rather than to their children or other descendants, which would disqualify them from using the additional nil-rate allowance. Currently, if an estate of a married couple is left to a sibling then anything above the £650,000 combined threshold (£325,000 allowance per individual) will be taxed at 40%.

However, from 6 April 2017, the inheritance tax free allowance for the family home will be introduced with an initial allowance of £100,000 per person per family home, taking the total maximum individual personal allowance for IHT from the current level of £325,000 to up to £425,000, or a total of up to £850,000 for married couples.

The allowance for the family home then goes up by £25,000 per tax year, so by 6 April 2020 onwards a couple with a family home will be able to leave their children or other direct descendants a combined estate of up to £1m without any IHT to pay. [1] However, if the same couple were to leave their family estate to a sibling, the IHT of 40% would apply on the difference between £650,000 and £1million, leaving a tax bill of up to £140,000.

The majority of people (72%) don’t know of or understand the changes that come into force in the new tax year, with legal experts at LV= Legal Services warning the public they need to act now and amend their Will to ensure they enjoy the increased tax allowance.

Even among those who do know about the changes, half (53%) didn’t realise that the increased tax-free amount can apply to cash proceeds from the sale of the home if you downsize or have to go into care.

Worse still, many people living ‘as married’ with partners, who would want their wealth passed to each other, don’t have wills (44%), so their estate will pass to their children, who would have no obligation to provide anything to their father or mother’s partner.

Martin Milliner, Director at LV= Legal Services, said: “This increased IHT allowance is a boost to those who’ve seen their homes rise in value and want to be able to pass on this wealth without sharp tax charges, but it’s crucial that they don’t fall prey to the sibling trap. Getting the right legal advice and amending your Will could take a few hours, but with potential to save a lot of money it’s time well spent.”

LV= Legal Services is an independent service in partnership with UK law firm Lyons Davidson, offering practical and easy to understand legal advice at transparent fixed prices. Straightforward quotes can be sourced online, and Lyons Davidson’s expert advisory teams are on hand to handle any specialist or more complicated requests.

In addition to Wills and Probate, LV= Legal Services also offers practical and easy to understand legal advice at an agreed fixed rate for:

  • Conveyancing;
  • Probate;
  • Personal Injury; and
  • Employment Law.

For further details, log on to LV Legal Services, or call 0800 032 8641 where the LV= Legal Services team is on hand from 8am through to 9pm Monday to Friday.

For further information please contact:

Lloyd Purnell, Press Officer, LV=, 0207 634 4433 / 07500 835 885

Example fictional case study

A family has lived in their home for over 50 years. The couple have two sons, the younger of which has never been able to work and has never left home.

The other son left home over 30 years ago and got married and had kids. He is a successful businessman and is wealthy in his own right. He has two daughters but after separating from his wife he moved back into his parent’s home.

Both brothers have now inherited the family home from their parents in equal shares. It was made clear in the Will that the parents wanted their sons to be able to stay in the house for as long as they wanted to. The home is currently worth £800,000. In order to enable the younger brother to stay in the family home for the rest of his life, the elder brother made a Will giving his half of the property to his brother and then the remainder of his estate to his two daughters.

Under the old rules, there would have been IHT to pay when the property passed to the younger brother but no more than if it had passed to the two daughters. But because of the changes to IHT, the elder brother will now have to decide whether to save his estate inheritance tax by giving the property straight to his daughters and hoping that they will look after their Uncle. Doing this would save up to £70,000 in inheritance tax overall – money which might be very helpful to the next generation.

Assuming that the elder brother’s entire estate is worth less than £2 million (the relief isn’t available otherwise), that the Nil Rate Band is intact but used on other assets, and that he dies on/after April 6th 2021. The whole property is therefore subject to IHT.

In those circumstances, the tax consequences of gifting the house to brother or children are as set out below:

Gives house to younger brother

House share valued at £400,000

Tax to pay on property £160,000

Gives house to daughters

House share valued at £400,000

Tax to pay on property £90,000

Same assumptions as above, but dies before 6 April 2017:

Gives house to younger brother

House share valued at £400,000

Tax to pay £160,000

Gives house to daughters

House share valued at £400,000

Tax to pay £160,000

Same assumptions, dies on/after 6 April 2017 but before 6 April 2018

Gives house to younger brother

House share valued at £400,000

Tax to pay £160,000

Gives house to daughters

House share valued at £400,000

Tax to pay £120,000

Death on/after 6 April 2018 but before 6 April 2019

Gives house to younger brother

House share valued at £400,000

Tax to pay £160,000

Gives house to daughters

House share valued at £400,000

Tax to pay £110,000

Death on/after 6 April 2019 but before 6 April 2020

Gives house to younger brother

House share valued at £400,000

Tax to pay £160,000

Gives house to daughters

House share valued at £400,000

Tax to pay £100,000

Death on/after 6 April 2020

Gives house to younger brother

House share valued at £400,000

Tax to pay £160,000

Gives house to daughters

House share valued at £400,000

Tax to pay £90,000

Footnotes

1. There are 17.6 million over-55s in the UK (ONS population maps). Of the over-55s surveyed, 10% said they’d left their home to siblings rather than their children or grandchildren – equivalent to 1.7 million over-55s.

Notes to editors:

LV= commissioned Opinium Research to conduct bespoke research among a sample of 1,000 UK residents who are over 55 years of age. Surveys were conducted online between 8th and 14th December 2016 and are nationally representative.

About LV=:

LV= employs over 6,000 people and serves over 5.7 million customers with a range of financial products. We are the UK’s largest friendly society and a leading financial mutual.

When we started in 1843 our goal was to give financial security to more than just a privileged few and for many decades we were most commonly associated with providing a method of saving to people of modest means. Today we follow a similar purpose, helping people to protect and provide for the things they love, although on a much larger scale and through a wide range of financial services including insurance, investment and retirement products.

We offer our services direct to consumers, as well as through IFAs and brokers, and through strategic partnerships with organisations including ASDA and Nationwide Building Society.

Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. LVFS is a member of the ABI and ILAG. Registered address: County Gates, Bournemouth BH1 2NF.

LV=, County Gates, Bournemouth, BH1 2NF, UK