Confused by inheritance tax?

Confused by inheritance tax?

Many of us are confused by the issue of inheritance tax – how it’s calculated for example, when and how we pay it.  Sadly, perhaps because it can be such a complicated subject, it is often overlooked.  This lack of planning can have devastating consequences on the financial circumstances of beneficiaries however, with the difference between inheritance tax payable on a planned estate as opposed to unplanned, often reaching thousands of pounds.

A recent survey revealed that 81% of people are irked by the idea of so much of their hard earned cash going direct to the tax man in the event of their death, yet three in ten of us expect our loved ones to be saddled with an inheritance tax bill, whilst another four in ten aren’t sure or don’t understand the process.  So what can you do about it?

First of all, what you need to know is that when you die, everything you own (including property, shares and savings) will be valued and totalled.  If this amount comes to over £325,000 (or £650,000 if you had a spouse who died before you), then under normal circumstances, 40% of everything above this amount will need to be paid under inheritance tax rules.  After you’ve gone, it will be up to your executors to pay this amount – before they receive a penny from your estate.  If they don’t pay up within six months, interest can be added to the amount due, resulting in an immense financial headache.

So how can you reduce this whopping 40%?  Well, there are a number of ways but they need to be examined right now, whilst you’re still alive.  These can take the form of gifting (giving specific amounts of money to your loved ones from now on, to reduce the value of your savings when you die for example) or tax relief, which may be applied in certain circumstances, such as within farming families or businesses.

The message is this – if someone were to relieve you of thousands of pounds right now, whilst you’re still alive, you’d be rightly furious and perhaps feel as though you’d been robbed.  So why allow the tax man to do it after you’ve gone? Think about what could be facing your loved ones and act now.

#iwcprobate #bereaved #probate

How much money can be released without probate?

How much money can be released without probate?

It is up to the executors of a will to handle the financial dealings of the deceased person.  Often, this means they have to apply for probate in order to begin to settle their estate.

On being provided with the death certificate; banks, building societies and other financial institutions will automatically freeze the deceased’s accounts until probate has been granted – a process which can often take months or even years, depending on the value and complexity of the estate.

This can obviously cause problems when the undertaker needs to be paid and the inheritance tax bill settled, all before the funds in their entirety are released.

Until recently, banks allowed executors to access a certain amount of money from the late person’s estate, so that at least part of these bills could be paid. This amount usually ranged between £15,000 and £20,000, dependent on the institution.  In recent weeks however, some of the more well-known banks have agreed to raise this limit, to allow more funds to be accessed which in turn, may help loved ones who are left with a financial burden.

Lloyds Bank has raised its limit from £25,000 to £50,000, whilst RBS has raised its limit from £15,000 to £25,000.

Whilst this may seem a great deal of money however, families are increasingly feeling the pinch when it comes to laying their loved ones to rest.  With the average funeral now costing around £7000, growing numbers are turning to loans and other forms of credit, to pay the undertaker.  It makes sense therefore, for adults to consider paying into a funeral plan whilst they still can, to ease the financial strain when they’ve gone.

#iwcprobate #bereaved #probate

Can I challenge a will where everything is left to charity?

Can I challenge a will where everything is left to charity?

When it comes to challenging a will, it is up to the court not only to decipher the true wishes of the deceased but to decide what is fair and right, when it comes to their next of kin.

The numbers of adult children contesting wills which have left either all, or the bulk of an estate to charity, is on the increase.  It is unfortunate, yet a fact of life that family dynamics can change and relationships break down.  In some instances, this rift proves irreparable, and the parent changes their will to leave their entire estate – or the largest portion of it – to charity, rather than give it to their child.

When faced with this situation, the court must first of all uncover the strength of the relationship between the deceased and the charity they named in their will.  Did they make regular donations during their lifetime?  Did they perhaps carry out volunteer work?  Or did the deceased personally benefit from their care and service in some way?  All of these would be valid reasons for a person to choose to show their appreciation, rather than bequeath their money for revenge against their child.

It doesn’t end there, however.  Even if the reasons given by the deceased for leaving all their money to charity are honourable and valid, the financial situation of their surviving children must also be considered.  For example, a recent legal case found that although a woman had deliberately left all of her money to three animal charities, she also had an obligation to her daughter, which she had chosen to ignore.  In that instance, the daughter was subsequently awarded a third of her mother’s estate.

If you feel that you have a valid case for claiming assets from a parent’s will from which you have been omitted, it is advisable to contact the executors of the will to see if an agreement can be reached.  Due to the tension and upset this could potentially cause, legal proceedings should only be commenced once this attempt has been made to negotiate.

 

#iwcprobate #bereaved #probate

Why writing your own will could well end up in probate dispute

Why writing your own will could well end up in probate dispute

A recent survey on behalf of Saga revealed that around 40% of adults now have a will in place.  Unfortunately, it also seems that approximately one quarter of these individuals have chosen to write their own will, without any input whatsoever from a will writing professional – running the risk of creating a probate dispute.

A number of principal reasons were stated for this, largely based on pre-conceived (and sometimes inaccurate) ideas of cost and the legal system.

The majority (37%) had felt that it would be cheaper to prepare their own will, rather than seeking legal advice and a quarter also felt that it would make the whole process quicker.  Some mentioned that they were uncomfortable with sharing such personal information with a stranger, regardless of their professionalism and guarantee of confidentiality.

There are, however, a number of risks associated with writing your own will without legal supervision, which depend upon the size of the family unit, the value of the estate and simple ambiguity.  Indeed, it was noted that one in fourteen respondents had either subsequently encountered a problem during probate, or knew of someone who had, after drafting a will themselves.  Nearly half said that the problem had led to a dispute and 39% said this had gone on to delay the probate process.

The complexities and legal knowledge required to write a will for all but the smallest and least complicated estates, is often misunderstood.  Very often, the wording included in the will is not specific enough and is open to question by family members, which often leads to a very bitter, unpleasant and costly dispute.  On the other side of the coin, it is not always advisable to mention specific sums of money which should be left to key individuals, as the value of the estate may change over time.

One of the most common mistakes is to draft one will and not regularly update it to reflect family or financial circumstances.  This can mean that some new family members are left out or there is not enough money in the pot to satisfy a particular bequest.

In some instances, a will has not been correctly signed and witnessed.  This renders a will invalid and, instead of the executor being able to fulfil the deceased's wishes, the probate office may be forced to apply intestacy and follow the standard rules of estate distribution, according to English law.

The lessons here are to firstly, seek legal advice from an experienced will writing or probate professional when writing a will.  Then, be sure to update it whenever any significant family or financial change occurs.  In this way, the probate process is much more likely to be carried out seamlessly and efficiently, without any inter-family squabbles, disappointment and bitterness.

#iwcprobate #bereaved #probate

Worried about paying inheritance tax.

Worried about inheritance tax.

It may shock you to learn that if you have been named the executor of a will, then you may well be held responsible for paying any inheritance tax (IHT) due on the deceased's estate, BEFORE you have received any money from probate.

If the deceased was a single person and their estate is valued at above £325,000, then you can expect to pay 40% of the value above this amount, if no tax reliefs are applicable.  If they were the surviving partner of a marriage, the amount, known as the nil rate band, is doubled to £650,000. This means that thousands of pounds may be required to pay off the inheritance tax debt, before you receive a penny from the proceeds of the estate.

It may be that there are enough cash savings held within the estate to pay off this debt, in which case HMRC might allow you to make a direct payment to them, straight from the deceased's savings account(s).  However, if there is not enough cash available, it will be up to you to make up the shortfall.  Although you will be able to recoup the money when probate has been granted, you must find a way to pay the debt up front.  You might choose to borrow the money from within the family or borrow it from the bank.  Banks are very familiar with this scenario and, as they know the loan will be settled relatively quickly, they are often amenable.

A slightly better scenario arises when the bulk of the estate is made up of property.  In this instance, HMRC will normally allow probate to be granted and the inheritance tax debt to be paid in installments over a maximum period of ten years.  Be careful though – this extended term brings with it additional interest to be paid on the outstanding balance.

In some cases, the estate may be held principally in the form of shares.  Technically, probate must still be granted and the inheritance tax debt paid before any shares can be sold.  However, HMRC often offers some flexibility here and you may be able to discuss the possibility of HMRC waiting until the shares have been sold, in order for you to pay the IHT bill, so long as it is considered a priority when allocating proceeds from the estate.

#iwcprobate #bereaved #probate

New IHT Family Home Allowance

New IHT Family Home Allowance

A new monthly record for the amount of Inheritance Tax taken by HM Revenue and Customs was set this April. The take of £397 million stands well in excess of the average monthly take of £260 million over the last ten years. Furthermore, the Inheritance Tax of £1 billion collected by HMRC for the three months to the end of May is the highest figure for any three month period since 2007, when £1.1 billion was taken in the three months to the end of August.

Although the government has announced reforms which it says should reduce the Inheritance Tax burden, some commentators believe that the proposed reforms are too complex and could distort the housing market.

As currently proposed, a new 'family home allowance' of £175,000 per parent will be added to the current individual IHT tax-free allowance for bequests made to children or grandchildren which include a main home. As a spouse or civil partner can pass on their tax-free allowance to their spouse or civil partner, this means that the IHT tax-free threshold can therefore rise to up to £1 million for estates including a main home left to children or grandchildren by a married couple or civil partners.

The basic IHT tax-free allowance of £325,000 is otherwise unaffected by the proposals.

Some commentators have observed that the proposals would add unnecessary complexity to the system and be of benefit only to those whose wealth is tied up in the family home.

It has also been noted that that as the proposals do not appear to apply to lifetime gifts, they may have the effect of deterring elderly people from downsizing for fear of increasing the amount of Inheritance Tax due on their estates. This could lead to some elderly people feeling that they are effectively trapped in houses that are now too large for their needs. Moreover, a reluctance on the part of elderly people to downsize could put further pressure on the already stretched supply of family homes in many parts of the country.

It is believed that there will be some restrictions on the proposed allowance, with the maximum amount of  the family home allowance being reduced on a sliding scale for estates worth between £2 million and £2.35 million.  Estates worth £2.35 million and above would not benefit from the allowance.

Critics of the proposals say that a better, simpler and fairer way to reduce the IHT burden would have been to increase the tax-free threshold for all estates.

It remains to be seen what effect, if any, the cost of implementing the current proposals might have on other IHT reliefs, but concern has been expressed that pressure may be put on other important IHT reliefs such as agricultural property relief and business property relief.

Deathbed gifts

Deathbed gifts

The recent, well publicised case of King v Dubery and others has helped to clarify the concept of deathbed gifts.

In this case, Mr. King resided with and cared for his aunt. When she passed away, he claimed that she had made a deathbed gift to him of the house, about four to six months prior to her death and had in fact, handed over the title deeds. Unfortunately, there was no such provision in her will.

Several animal charities, who stood to share the residue of the deceased's estate, challenged this claim and in July last year, the case was heard before Charles Hollander Q.C. at the High Court.

In English law, deathbed gifts require that the giver must be aware that their death is imminent and the gift can only take effect in the event of their death.

In this case, there was no evidence to show that Mr. King's aunt was thought to be seriously ill. She had not indicated that she expected to die shortly, nor had she recently consulted a doctor. Moreover, she was not scheduled to undergo a risky surgical procedure nor undertake a dangerous trip.

The court did, however, hear evidence that Mr. King's aunt had made several unsuccessful attempts to alter her will in order to leave the house to her nephew. In the judge's view, these attempts were sufficient to demonstrate that she had become increasingly preoccupied with her impending death.

Taking this, and the recent case of Vallee v Birchwood (in which the court found that a period of five months between the gift being made and the death of the giver satisfied the test for deathbed gifts), into account, the judge ruled that Mr. King's aunt had indeed made a deathbed gift of the house to him.

The charities appealed this decision in the Court of Appeal.

In overturning the High Court's decision, the appellate judges held that the giver must believe that death, for some reason or another, is impending. The judges observed that in most of the reported cases of deathbed gifts, the gift had been made when the giver was gravely ill, often only a matter of days prior to their death.

Mr. King's aunt, said the judges, had no reason to consider that her death was imminent. They further held that her attempts to change her will were not necessarily made in order to make a deathbed gift of the house. Finally, the judges concluded that the case of Vallee v. Blackwood, on which Mr. Hollander had based his decision, had been wrongly decided.

#iwcprobate #bereaved #probate

Do I need a probate specialist?

Do I need a probate specialist?

Losing a loved one is often a dreadful experience. But however harsh or unfair it may seem, life goes on: children have to go to school, shopping has to be done, bills have to be paid and the affairs of the deceased have to be wound up.

Settling the deceased's affairs can be a complicated process. Even a straightforward estate will usually involve having to close bank accounts, claim on life insurance policies, settling the deceased's debts and distributing the estate to the lawful beneficiaries.  This doesn't happen automatically, and  someone has to obtain lawful authority to deal with the deceased's estate.

In England and Wales, this will mean going through a process known as probate. The procedures are different in Scotland, where the equivalent process is called confirmation.

Probate may not be required in the case of smaller estates – i.e. under £5000. In this instance, banks and other financial institutions may release funds belonging to the deceased on presentation of a death certificate. Bear in mind though, that even if probate is unnecessary, the deceased's estate must be distributed in accordance with his or her will or – if there is no will – in terms of the rules governing intestate succession.

If the deceased left a will, the person nominated in it as executor should apply to the Probate Registry for a Grant of Representation. This gives the executor legal authority to settle and distribute the deceased's estate.

If there is no will, or a will but no executor, then the process is a little more complicated. Application will have to be made by the deceased's next of kin (as defined by the law) for Letters of Administration to be granted.  There may be more than one person entitled to apply for Letters of Administration. 

Obtaining professional help to obtain probate and administer an estate eases the burden for the executor and should ensure that the process runs as quickly and efficiently as possible. It can also help to shield the executor or administrator from family issues that can sometimes arise over the handling and distribution of the deceased's estate.

#iwcprobate #probate #bereaved

Rik Mayall family could lose out on inheritance

Why no will could mean Rik Mayall family loses out on inheritance

The Daily Mail recently reported that the family of the comedian Rik Mayall could be faced with a substantial Inheritance Tax bill because he died without having left a will.

Mr. Mayall, who was married with children, left an estate valued at just under £1.2 million. According to the laws governing succession in England and Wales (the law is different in Scotland),

 

His widow is entitled to inherit all of his personal property and the first £250,000 of his estate. Mrs. Mayall will also inherit a life interest in half of the remainder of his estate (meaning that she is entitled to the interest generated by that sum but not the capital itself), with the remaining half being split between his three children.

Mrs. Mayall's share of the estate is exempt from inheritance tax, but the portion of it which will be inherited by his children will be subject to inheritance tax if it exceeds the inheritance tax threshold of £325,000.  Had there been a will leaving the whole or most of the estate to Mrs. Mayall, little or no inheritance tax would have been payable.

 

This illustrates the importance of inheritance tax planning. Making a will is a simple, relatively inexpensive but very important element in that process.

 

A will has two basic functions. Firstly, it ensures that your estate is distributed according to your wishes, rather than whatever the rules of intestacy stipulate at the time of your death . Secondly, it is a valuable element in setting up the most tax-efficient regime for the distribution of your estate, thereby ensuring that as much of your estate as possible passes to those whom you wish to provide for.

 

As the law currently stands, bequests made in terms of a will by a person to their spouse or civil partner are exempt from inheritance tax irrespective of the size of those bequests. However, if bequests totalling £325,000 or more are made to anyone other than a spouse or civil partner then inheritance tax is chargeable on the amount by which those bequests exceed the threshold of £325,000.00.

 

Inheritance tax planning is a specialised field. For that reason, we would suggest that you consult a professional tax-planning expert in order to make sure that your loved ones receive the maximum value from your estate.

 

The world is an uncertain place, and the future unforeseeable,  so we would suggest that you do this as soon as possible.  Once made, you can change your will and alter your tax-planning regime as time passes.

#iwcprobate #probate #bereaved

Life insurance and inheritance tax planning

Life insurance and inheritance tax planning

The reason for having life insurance is simple: to provide for your loved ones in the event of your passing. However, unless you take suitable precautions it's possible that some of the proceeds of your life insurance policy might end up going to an unintended beneficiary: the taxman.

The reason for this is simple. It's called Inheritance Tax ('IHT'), and it applies to estates worth over £325,000.00. Worse still, IHT is charged at 40%. So that could mean that your loved ones lose as much as 40% of the proceeds of your insurance policy. 

You may think that this doesn't apply to you, but rising house prices and a static IHT threshold could mean that your estate falls within the threshold for IHT when the time comes.

If that isn't sobering enough, consider this: a recent survey by Legal & General indicated that over 90% of their whole-of-life policy holders had taken no steps to protect the proceeds of their life policies from IHT. This is backed up by Aegon's own research, which indicates that 94% of whole-of-life policies are bereft of IHT protection. And this research comes on the back of research by Unbiased that estimated £530 million is paid out annually to HMRC by way of IHT charged on the proceeds of life insurance policies.

The problem is worse, says Legal & General, for unmarried couples, as they do not benefit from the same tax allowances that apply to spouses and civil partners. And this is no small problem – approximately 5.3 million adults in the UK fall into the category of unmarried couples.

There is, however, a solution to this problem – have your life insurance policy written in trust rather than have the proceeds of it paid directly to one or more individuals. In this situation, the proceeds of the life policy are paid to trustees, do not form part of your estate and are therefore not counted for IHT purposes.

Apart from the IHT benefits, there's one other advantage of writing your life insurance policy in trust in that the proceeds don't have to go through probate. This means that it's likely that payment will be made to the beneficiaries quicker than if the policy had not been written in trust. 

#iwcprobate #probate #bereaved

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