Inherit, Inheritance tax, Uncategorized

No Inheritance Tax on estates worth up to £1 million? Not quite!

George Osborne announced the introduction of an additional Inheritance Tax (IHT) Nil Rate Band (NRB) for a person’s main residence in the Summer 2015 Budget. This was good news for with wealth tied up in their family home. The existing NRB of £325,000 per person or £650,000 per couple, on which 40% IHT is not paid, will remain the same. But from 2017/18, an additional Residence Nil Rate Band (RNRB) of £100,000 per person will be introduced, which will increase to: £125,000 in 2018/19; £150,000 in 2019/20; and £175,000 in 2020/21. In 2020/21, this means a house worth £1 million could be passed on tax free. But tax planning is still important, as there are a number of drawbacks you have to avoid in order to make sure you are eligible for the full amount.

Drawback 1 = you need to be married

Spouses* can inherit their other half’s share of an estate tax free so the NRB does not need to be used up. This means the deceased’s £325,000 NRB can transfer to the survivor, who will then have an IHT allowance of £650,000 when they die. The RNRB can also be passed on to the survivor so in 2020/21, this will equal £1 million. Unmarried couples do not have the right to pass on NRBs to each other.

Drawback 2 = only your children can benefit

Spouses who do not have children will miss out on the RNRB. The property must be passed to lineal descendants, such as children (including adopted/foster/stepchildren, children under a guardianship, and their direct descendants) and grandchildren, but not nieces and nephews.

Drawback 3 = the £1 million allowance does not apply now

The allowance will be phased in over the next five years so the £1 million will actually only apply in 2020/21.Drawback 4 = keep your wealth in your home

If you have a large investment portfolio and no house, you cannot benefit from the additional allowance, only the £325,000 NRB. But if your total estate is over £2 million, the RNRB will be tapered away. An estate with a net value of more than £2 million will see the band withdrawn at a rate of £1 for every £2 over the threshold.

Other points to consider

Trusts

The RNRB may be lost where, for example, the property is placed into a discretionary Will trust for the benefit of the children or grandchildren.

Downsizing

The family home does not need to be owned at death to qualify. This helps those who may have downsized or sold their property to move into residential care or a relative’s home. The RNRB will still be available provided that:

  • The property disposed of was owned by the individual and it would have qualified for the RNRB had they retained it;
  • The replacement property and/or assets form part of the estate and pass to descendants;
  • Downsizing or disposal of the property has to take place after 8 July 2015. But there is no time limit on the period between disposal and death.

Multiple residences

Only one residential property will qualify. It will be down to the personal representatives of the estate to nominate which one should qualify if there is more than one. A property which was never the deceased’s residence, e.g. a buy-to-let, cannot be nominated.

*For ease, spouse will refer to civil partner as well.

 

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Uncategorized

How does the decision in Ilott v Mitson affect you?

The decision of the Judge in the case of Ilot v Mitson, reported widely in the news recently, is worrying to many people who have made a Will, or who are considering making a Will.

When making a Will, you should give a lot of thought to deciding who to include and, sometimes, who to exclude as beneficiaries (i.e. the people who receive your estate when you die).

Once the Will is made, you would expect to have peace of mind that your wishes, as set out in the Will, would be carried out.

The reasons for excluding somebody can be:

  1. Family fall outs
  2. No contact
  3. That person is reasonably provided for (by you during your lifetime or they are financially well off in their own right)
  4. There are more preferential beneficiaries
  5. General dislike of the person

But any disappointed potential beneficiary not included in a Will could make a claim under s2 of the Inheritance (Provision for Family and Dependants) Act 1975 provided that they fall within one of the categories of claimant defined under s1 of the Act.

Now Ilott v Mitson appears to have widened the scope for successful claimants but when looking at the decision in depth, has it really?

The facts of the case (in brief) are:

  • An adult daughter fell out with her mother many years before the mother died
  • There was very little contact between the two
  • The mother made a Will leaving her estate between several charities
  • No provision was made for the daughter on the basis of the history between them

The Court’s decision to grant the daughter a share of the estate was based on the following facts:

  1. The daughter had a reasonable expectation to inherit from her mother’s estate irrespective of their past relationship
  2. The daughter’s personal circumstances were taken into account, in that she lived in council owned accommodation and was mostly reliant on state benefits
  3. The deceased had little or no personal connection with the charities, in that she did not donate to them on a regular basis
  4. It was felt that the mother was acting spitefully in excluding her daughter from the Will

The decision made was based on a very narrow set of circumstances which were personal to the daughter herself and would not be applicable to every claim made by a potential beneficiary. Therefore this case cannot be seen to automatically set a precedent for future claims on estates.

In view of this case, when excluding someone from a Will, it is advisable to prepare a supplementary letter including the following:

  1. Your reason for their exclusion from the Will
  2. Details of your past relationship
  3. The reason why the beneficiaries named in the Will should benefit rather than the excluded person
  4. Any other supporting documents

Please be mindful that this will not prevent a disappointed person making a claim but it will provide valuable evidence as to why the claim should not succeed.

Uncategorized

Making a Will – How to Avoid Claims Against Your Estate

You’ve made a will so that should mean your estate is in safe hands when you die and the people you want to receive a legacy will, right? Well, not necessarily…

Claims against the executors of estates have risen radically. High Court statistics show there were 107 cases in 2012 and 368 in 2013 (more than three times as many) for breaches of fiduciary duty, i.e. executors not acting lawfully and in good faith.

This rise may be because more and more people choose to appoint friends and family, rather than professionals, as executors of their wills. You might think you can trust your family and friends (and we’re not saying you can’t) but being the executor of an estate can be a difficult job and not understanding your duties and responsibilities is not an acceptable excuse, according to the law.

Some claims issued last year involved allegations that executors had favoured themselves when making distributions, or had even intentionally stolen assets from the estate, using the justification that they did not know what they were doing was wrong.

Think about what else executors have to contend with: complex family arrangements; being an executor and a beneficiary; large estates with complicated assets; and the alleged growth of litigation culture (“See you in court!”). Nowadays taking someone to court seems more commonplace and you can seek guidance on how to do it online. Claimants know the court action itself may deplete the entire estate but if they can’t have it, nobody will! Recent cases involving famous families feuding include the estate of the actor Peter Ustinov and the artist Lucien Freud.

If you are making a will and you can envisage any problems arising after you die (for instance a combative family, tax implications or complicated assets), think about appointing a professional alongside your lay executors. You might think that you will save money by appointing lay executors who won’t charge for their services so that your beneficiaries will receive more. But long after you’re buried, the costly consequences of court action may mean that the last thing your hard earned assets are spent on after your funeral is both sides’ legal bills in a court case about what your executors did or didn’t do.

If you would like advice, please contact the Morrish Solicitors elderly client department on 033 3344 9600 or complete our enquiry form.

Uncategorized

What does Inheritance Tax mean?

The tax year nears its end so have you used your annual gift exemption for Inheritance Tax (“IHT”) this year?
 
What does that mean?
 
Well….. IHT is the tax which applies to your estate on death and it’s 40% on the value above a threshold figure, currently £325,000. There are certain exemptions e.g. inheritances to spouses and charities. Unfortunately IHT also catches the value of gifts made in the seven years prior to death, unless those gifts are exempt. So someone leaving all of their estate to their favourite nephew Jonny on their death-bed doesn’t save tax.
 
However each person can give away £3,000 to the family (or others) each tax year and this is always exempt. You can also catch up on the previous tax year’s allowance if you didn’t use it last year. There are other gift exemptions which may be useful. The £3,000 figure may not sound much (in fact it hasn’t changed for many years) but you might as well use it.
 
So as the end of the tax year approaches don’t just think about topping up your ISA – give some thought to estate planning as well.