Tax situation

Not all clients will necessarily have a problem with IHT. In recent years, this has become more common due to the growth in stock market values and property prices, combined with a £325,000 threshold which has not increased since April 2009, albeit the main residence nil rate band has gone some way towards redressing this. It has been said that IHT is now impacting those of moderate means in addition to the wealthy. The introduction from April 2017 of the residence nil rate band has gone some way to alleviate this. The residence nil rate band permits each individual an additional allowance, currently £175,000, on top of the basic nil rate band where a main home is left to a direct descendant. The allowance relates to residential property only and, like the main nil rate band, can be transferred between spouses on the first death.

The Laws of Intestacy

The laws of intestacy are a default lawful position intended to apply where a client passes away without having left a will. The legal term for this is dying ‘intestate’. In this situation, there is an established order of precedence for the distribution of their assets. If a person does not have a will, then their estate will be dealt with under the law of intestacy (s46 Administration of Estates Act 1925).

This means a fixed sum from the estate will be due to their surviving spouse and the rest of the estate will then be divided equally between the spouse, blood-line children and legally adopted children (but excludes step-children).

Since 2014, the statutory amount due to the surviving spouse has been £250,000 along with the personal items belonging to the deceased spouse and an absolute interest in half of the remaining estate. New rules came into force on 6 February 2020 that have increased the amount to £270,000.

Pensions

Since the pension freedoms in 2015, the estate planning landscape has also changed. Unused flexible benefit pension funds (loosely, money purchase entitlements) can now be left to dependants or nominees on the death of the scheme member and subsequently to further nominees (known as successors). This means that pension funds can effectively be passed down through generations. Pension funds are not subject to the IHT regime and are not counted as part of the deceased’s estate. Instead, they are tested against a lifetime allowance, which currently stands at a standard £1,073,100. The lifetime allowance is scheduled to be abolished from the start of the 2024–25 tax year. In the event of death before the age of 75, subject to a lifetime allowance test, the funds can be taken tax free by the beneficiaries. This makes pensions a potentially very valuable tool and their importance as part of an individual’s overall estate planning should be recognised.

The order of precedence in England & Wales is as follows:

• Spouse/civil partner – a lawful spouse or civil partner will inherit the deceased’s possessions, plus assets worth up to £270,000.
  If the estate, excluding personal possessions, exceeds £270,000 in value then the spouse will receive the following:
  • the first £270,000 absolutely, and
  • a half of the remainder.
    The other half of the remainder will be shared equally between the deceased’s surviving children, or their offspring if the child predeceased them. Where there are no surviving children or descendants thereof, the whole estate will go to the spouse. This does not include unwedded or cohabiting partners, sometimes referred to as the deceased’s ‘common law’ spouse.

• Children – as noted above, where there is a surviving spouse, the children will be entitled to one-half of the excess value of the estate above £270,000. Where there is no surviving spouse, the estate will be shared equally between the children of the deceased. This includes legally adopted children, but not, for example, step or foster children. Where a child of the deceased has previously passed away, any subsequent issue, such as a grandchild or great-grandchild, will be entitled to inherit in their place.

• Parents – should the deceased have passed away unmarried, with no linear descendants, then any surviving parent will be entitled to the estate. In the event of both parents being alive, they will be entitled to an equal share.

• Brothers or sisters – in the event that there are none of the above, the estate will be shared equally between any brothers or sisters. In the event of a brother/sister having previously passed away, any surviving children (nephews or nieces of the deceased) may inherit in their place.

These are followed by:

• • • half-brothers or sisters (or their children if they have already passed away)
    • grandparents
    • uncles or aunts (or their children, the cousins of the deceased, if they have already passed away), and
    • half-uncles or aunts or their children.

If none of the above can be traced then the deceased’s whole estate would become the property of the Crown.

Any minor children will not be entitled to absolute ownership of an inheritance until such a time as they reach the age of 18 or enter into a marriage or civil partnership before this age. Until this point, the executor(s) will manage the funds on their behalf.

Example

Albert passes away at the age of 90. He leaves behind a second wife, Jean, aged 85. Albert also has two surviving children, Joseph and Paula, born to his first wife, who predeceased him. Jean was also a widower before they met and had one daughter, Joanna, by her deceased husband. Albert had not left a will at the time of his death. His estate was valued at £500,000.

In this instance, Jean would benefit from personal possessions, plus the first £270,000 of his estate and an absolute interest in £115,000. The other £115,000 (£500,000 – £270,000 – £115,000) would be split evenly between Joseph and Paula. Joanna would not qualify as she was neither his issue, nor lawfully adopted.

The order of precedence in Scotland is as follows:

Under Scottish law, the position is different and can be complicated. Once debts and other liabilities have been paid from the estate, the surviving spouse or civil partner has certain prior rights. This is made up of:

• the rights to a home in which they were resident at the time of the deceased’s death to a value of £473,000
• furnishings up to the value of £29,000
• the sum of either £50,000 or £89,000, depending on whether the deceased left children.

Following on from prior rights on the estate come legal rights. Where the deceased left children (or, if already deceased, linear descendants such as grandchildren), they will receive any cash over £50,000 and two thirds of the residual estate, with one third going to the spouse. Where there are no children, the spouse will benefit from £89,000 in cash and half of the remaining estate. The other half is split

again, with half going to the parents and the other half split evenly between surviving siblings. If there are no parents, siblings will take the full entitlement and vice-versa. Where there are no surviving children, parents, brothers or sisters, the spouse will be entitled to the entire estate.

Where there is no spouse or civil partner, prior rights do not apply. In this case, the entire estate will be shared between the children or their descendants. Where there are none, the order of priority is parents/siblings equally, aunts/uncles, grandparents, then great aunts/uncles. If none of the above are alive, then unless any other surviving relative can be found, the entire estate will pass to the Crown.

Example

Agnes passed away at the age of 58. She leaves a husband, Peter, aged 60. They have no children yet Agnes’ mother, Edna, is still alive. In addition, she leaves one brother, George, who has a family of his own and a sister, Catherine, who is unmarried with no children. Agnes died intestate and her estate was valued at £750,000, including a property worth £400,000 and possessions of £20,000.

Peter would get the property and possessions, plus up to £89,000 in cash. The remainder of the estate would be split into two parts, one half to Agnes’ mother and the other half split evenly between her two siblings.

The order of precedence in Northern Ireland is as follows:

The position in Northern Ireland is quite similar to that in England and Wales. A surviving spouse will have first claim, however, they must survive the deceased by at least 28 days.

The spouse will automatically take the first £250,000 plus possessions. The remainder will be split 50/50 between the spouse and child (or, if there are more than one, one third to the spouse and two thirds to the children).

Where there are no children, but surviving parents, the spouse’s share is increased to £450,000 plus possessions, with the remainder split evenly between spouse and parents. If the parents are deceased, however, siblings remain, then the spouse receives £450,000, plus possessions, with the remainder split half to the spouse and half in equal shares to the siblings. In the absence of children, parents or siblings, the whole estate will pass to the spouse.

Where the deceased leaves no spouse, children or linear descendants will share the estate evenly. In the event that there is no spouse and no children, the order of precedence is parents, siblings, grandparents, then uncles & aunts. If none of these remain, then the closest blood relative may claim the estate. If no next of kin can be traced, the entire estate will go to the Crown. 

There are several sets of circumstances which could lead to either an entire will or a specific bequest being determined to be invalid. Some of these include:

• the will not being properly signed, dated and witnessed
• signs that the will has been altered or tampered with
• signs that it has been made under duress or undue influence
• the testator did not have proper legal capacity when making the will
• the testator not being of sound mind and understanding when making the will
• a will which fails to dispose of all assets could fail in certain circumstances
• any bequest to a beneficiary who is also a witness, or a spouse of, will be considered invalid
• if a dependant is left out without an appropriate clause, this could also be open to challenge.

As we can see, the list is significant and it is, therefore, important that the will is legally watertight.

As we can see based on the above, ensuring that a valid and up-to-date will is in place is a key part of estate planning. The laws of intestacy are inflexible and the writing of a will is a key part of ensuring that the client’s assets are left to their preferred recipients in a tax-efficient manner.

Written by: Ben Eccles – Independent Financial Adviser