Making a will has become even more important in the UK as the government seeks to increase its tax takings.
Alarmingly, only approximately 63 per cent of British citizens have a will. The importance of making a will, and the disastrous financial consequences that might follow if you neglect to do so, have been highlighted this week by reports on the late Rik Mayall, who died intestate. Taking, for example, the figures published in respect of Mr Mayall’s estate, the impact of not having a Will on his family can be illustrated. Mayall could not direct how his estate was distributed and the statutory inheritance rules regulated the devolution of his estate.
The intestacy rules provide that the first £250,000, plus the personal chattels, are left to the spouse. The balance is split equally between the spouse and the children. The share left to the spouse is free of inheritance tax (covered by the spouse exemption), but the balance to the children over the current nil rate band (£325,000) is subject to inheritance tax at a rate of 40 per cent. Applying the law to Mayall’s estate, the tax payable amounts to £60,000.
This is calculated by taking a net value estate of £1.2m and deducting the sum of £250,000, leaving a balance of £950,000. The spouse inherits 50 per cent (tax free), leaving the children to inherit £475,000. After deducting the nil rate band (£325,000) the taxable estate is £150,000, which in turn is taxed at 40%, leaving an inheritance tax liability of £60,000. In such an estate the spouse’s financial position might be precarious; not only does the tax have to be paid, but children are entitled to receive their statutory legacy. They could force a spouse to sell the home if there are insufficient cash assets available in the estate to meet this liability.
Could a will have protected the family?
English Law provides that a person can leave his/her estate to whomsoever they wish, subject always to the knowledge that a claim might be made against the estate under the provisions of the Inheritance (Provision for Family and Dependants) Act 1975 as amended. If a person makes a will gifting all the estate to his spouse (whether as an absolute gift or under a life interest) on the first death no inheritance is payable. The percentage of the unused nil rate band is transferrable to the surviving spouse’s estate. In this example, the percentage would be 100 per cent, therefore the family could claim twice the nil rate band at the rate applicable at the date of the second death.
Alternatively, if a person wanted to benefit their spouse and children without incurring an inheritance tax liability on the first death, it is possible to leave up to the maximum amount of the nil rate band to the children and the balance to the spouse. If a will is written in this fashion, the transferable nil rate band will not be available upon the second death. It is possible to leave less than the maximum amount of the nil rate on the first death, meaning that a percentage of the transferable nil rate would be available on the second death.
Consider that a person leaves £200,000 to the children and the balance to the spouse. On the second death, 38.47 per cent of the transferable nil rate band will be available to be transferred to the surviving spouse’s estate. Using the formula 200,000/325,000 x 100 = 61.53 per cent, this means that 61.53 per cent of the nil rate band was used on the first death, leaving 38.47 per cent available to be transferred. So to answer the question posed: a properly drafted will would have indeed protected the family.
Can a post death variation mitigate the Inheritance tax payable on the first death?
Contrary to popular belief, your last Will and Testament may not be your last Will and Testament. Under current law, by using a Post Death Variation to vary the statutory legacies on an intestacy (or the provisions under a Will) it is possible to divert all the assets to the surviving spouse, meaning no inheritance tax is payable on the first death. Relying on a post death variation is risky, however, as beneficiaries must be in agreement for this to happen, yet there is no guarantee that a beneficiary will agree to give up their entitlement. To take advantage of this useful tool, Deeds of Variation must be completed within two years of the date of death. Presently, this is an option for the family of Rik Mayall.
Are Deeds of Variation to become extinct?
In his last budget, George Obsorne announced that the Government would review the use of Deeds of Variation and a family’s ability to amend the terms of a will (and by definition the intestacy rules) after a person has died. A report is expected by Autumn 2015. If, as is feared, this is removed, not making a will will be financially disastrous for many families. By making a will, irrespective of your age, you can safeguard against life’s unexpected turns, helping to ensure that your estate passes to your loved ones in a tax efficient manner. This is particularly salient as, in light of the Government’s announcement, it has become even more important not to rely on post death variations.
Colin Glass is a partner and Head of the Wealth Protection and Private Client Department at DWFM Beckman Solicitors. .