Researchers at LV= said many could miss out on the the Family Home Allowance because they've assigned their sibling to inherit their family home and not a direct descendant.
Missing out could cost up to £70,000 in additional tax for an individual or £140,000 for a couple.
The research by the insurer’s independent legal service showed 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.
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%) said they didn’t know of or understand the changes that come into force in the new tax year.
Even among those who did 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.
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.”