There aren’t many people in the UK who like the idea of inheritance tax – it seems that it’s just the politicians who are keen on it. But what can be done about it? Surely it is something that must simply be paid and be done with?
Not necessarily. There is an inheritance tax loophole that more and more people are taking advantage of.
It all relates to the ‘deed of variation’. The dead of variation allows the beneficiaries of a will to redirect the assets left to them to other people. But how does this help?
Firstly, it means that the inheritance can be given straight to those who might have a more immediate need for it such as grandchildren rather than children. Secondly – and perhaps more importantly in many respects – it can reduce the overall inheritance tax liability for the family. It effectively diverts wealth away from an estate that is already close to the inheritance tax liability threshold, and it means that the estate won’t be taxed twice.
There are certain criteria that need to be met for this to happen, however. The changes must be made within two years of the death. All the beneficiaries within the will must agree to any changes made, otherwise it cannot happen. They must all sign the variation. The variation deed must be very clear about who is to inherit, and everything must be set out in writing. It should also contain a stamp duty exemption certificate if any stocks or shares have been changed. If the changes are being made with regards to inheritance tax or capital gains tax, there must be a signed note to that effect along with the deed of variation.
After someone dies, the first people (or rather, for the most part, companies) who need to be paid are any creditors. This must be done before anyone is given their share of the inheritance, and once it is finalised by the executor, whatever is left can be distributed as the deceased intended.
One question that is often asked, however, is what happens if the estate cannot pay the creditors? What is it is a ‘poor estate’? This problem actually happens a lot more than most people would imagine, and is especially prevalent when people die unexpectedly, and therefore they haven’t had a chance to tie up any loose ends, or pay off any debts before passing away.
There are some strict rules in place that allow executors to work out which creditors to pay first, assuming there is not enough money in the estate to pay all of them. A specific payment scheme will have to be set up – and the executor will be liable if anyone is paid out of order, so it is essential to speak to an expert before paying anyone.
If the estate is poor then some – perhaps even most – of the creditors will not receive the full amount of money owed. If they did, the estate could easily be pushed into insolvency, and there are safeguards in place to ensure that this does not happen. However, the executor may need to see certain assets in order to satisfy a creditor’s claim – these assets form part of the estate, after all, and need to be included in any valuation and payment plan.
Once the creditors have been paid as much as possible, the rest of the estate will be available for the beneficiaries. It is important to note, however, that sometimes there is nothing left at all.
Parents will, for the most part, want to name their children as a beneficiary of their estate once they have died. But what happens if that child is a minor (under 18) at that time? Are they able to inherit?
The answer is that they are not able to receive their inheritance, but that doesn’t mean that you can’t name them as a beneficiary. It may sound strange, but as long as you include a caveat within the will that states that if the child is under 18 at the time of your death then their inheritance will go into trust, then there should be no problem.
But even if you don’t specify what type of trust you wish your child’s inheritance to go into, there will be an automatic trust arranged. This trust (over which you will have no say as it won’t have been arranged in advance) means that your executor will have the responsibility of the money, property, or other assets until your child becomes an adult at the age of 18.
If you set up a trust yourself, you can choose any age (over the age of 18) for your child to receive their inheritance. This can be useful if the sums are particularly large, and you feel that you would want your child or children to inherit only when they are more financially responsible, which often comes with age.
Sometimes it can be a good idea for the trustee of your child’s trust to also be the person named as their guardian. This means that everything can be looked after in one place, and there will be no confusion. However, it is perfectly possible to name different people for each role. As long as the information is written in your will, and discussed (ideally) with the people concerned beforehand, then everyone will understand what is to happen, and how.
Mention the word ‘will’ or the term ‘will writing’ and you might imagine that the majority of people would know exactly what you mean. However, you would be wrong. A survey recently carried out by Macmillan Cancer Support suggests that a huge 98 percent of people can’t actually describe what a will is really used for.
The same survey also said that although almost 70 percent of people like to plan ahead, and just under half are happy to talk about what they want to happen before, during, and after their death, still just 40 percent of the adult population of the UK have written their wills. And maybe the two things are connected – perhaps it is the misunderstanding about what a will is for that is causing people to not write one, when in reality everyone should do exactly that.
The misunderstandings that come with the idea of will writing include thinking that you have to be over a certain age (40 is the one that most cite) before you can write one. This is borne out with evidence that shows that 80 percent of 18-34 year olds don’t have a will compared to just 32 percent of those over 55. Another confusion is the cost of will writing. It is often assumed that will writing is a very expensive process, when in reality the cost of usually a lot less than people think.
But the problem comes when people think wills are solely about money. And those who have very little in savings or no assets therefore don’t think that a will is relevant to them, or their families. This is now the case, however. Wills are about more than who gets what. They can also set out what the deceased would like to have happen after their death, and this is especially important if children are involved.
If you are unsure about what a will is really for, and whether having one would benefit you or your loved ones, speak to an expert such as IWC for more information.
Although most wills are executed without any major issues, and probate is granted, there are some circumstances in which additional delays will happen as checks will need to be carried out. One of these times is when one of the beneficiaries or the executor themselves has been declared bankrupt. There are some essential steps that will need to be carried out in order to the delays to be kept to a minimum.
The main problem is that, due to any kind of bankruptcy order, the beneficiary may not be able to receive their inheritance; it may have to go towards paying off debts or other such things. And it could also be that anyone who is bankrupt may not be able to take on the role of executor due to their bankruptcy order, and this is especially true if they need to oversee the sale of a property. Beneficiaries may also have concerns over someone who has had issues with money in the past dealing with the distribution of the estate.
Of course, the deceased may not have been aware of the bankruptcy as it is often something that people keep to themselves. This does, however, have implications later down the line. Often with an inheritance, the money would need to be paid to the ‘trustee in bankruptcy’ rather than the beneficiary instead, and if the beneficiary were paid, the trustee could sue the executor for the same amount. This is why bankruptcy checks need to be carried out on executors and beneficiaries.
However, what can be done if the beneficiaries are living abroad? It is no longer a question of a straightforward search with the Land Charges Register. The Land Charges Register will only show bankruptcies that have occurred in England and Wales, not any further abroad.
In order to find out whether a beneficiary living abroad has been declared bankrupt and has a bankruptcy order on them, you should contact an expert who can carry out the necessary searches for you. IWC can offer this service, meaning that delays are kept to a minimum and probate can be granted quickly.
Ex-husband's inheritance appeal goes ahead
The Court of Appeal heard a case recently, whereby the ex-husband of a woman was granted an appeal to contest the validity of his late mother in law's will, in a bid to claim his alleged inheritance.
Prior to their divorce ten years ago, the couple had allegedly formed an agreement whereby on the mother in law's death, £100,000 from her estate would go to her daughter and the remainder of the balance of the estate would then be divided between the same daughter and her then-husband.
Although no dates are given, at some point in time after this event, the couple divorced and the wife's mother passed away. Her daughter was indeed left £100,000 but instead of the balance of £150,000 being divided between the daughter and the now ex-husband as previously agreed however, the entire balance was left to the woman's children.
The ex-husband subsequently argued that he was entitled to half of the balance which amounted to £75,000 and brought about a probate claim to challenge the validity of the will. This initial claim was turned down however, as the court found that he did not have enough "interest" in the will as a creditor of the beneficiary. The only people entitled to challenge a will it noted, are actual executors, beneficiaries and creditors of the deceased.
The Court of Appeal felt differently, however. Lord Dyson ruled that the man was connected enough to the estate to maintain sufficient "interest" and recognised that the only way he could fight for his money was to challenge the validity of the will.
The case will now go to appeal.
Whether or not a home is insured isn’t often a question that is asked during probate – certainly not by those who are dealing with the deceased’s estate. However, ensuring that the property is actually insured is a rather important thing to do. The home insurance that should have been taken out and paid for by the deceased will no longer be valid – their bank accounts will be wound down, for a start, and so those who are responsible for the estate will need to make sure that it is organised.
Property is potentially an awkward issue after a death, and it is usually in the family’s best interest to sell it as quickly as possible to recover money. But until it is sold, the upkeep should be remembered – and that is the job of the beneficiary.
There is a product, however, that should help, at least in regards to insurance. It is called unoccupied property insurance. In order to do this, it is often required to have the approximate property value.
Reasons behind keeping an unoccupied house insured include damage caused by thieves or those trying to break in in order to stay in the house because they know it is empty. And what about burst pipes or general wear and tear? The heating will, in an empty house, be turned off. This will save money. But it can also lead to pipes freezing and bursting and therefore insurance with additional emergency works cover is often useful. It will be better to have the insurance dealing with these problems rather than the beneficiary who may not be able to afford large repairs and will have to sell the house at less than it is worth.
A vacant house should be inspected regularly to ensure that everything is as it should be.
Not everyone is happy to receive an inheritance. They may not need the property or money. It may be more trouble than it’s worth (due to tax or the cost of maintenance), or there could be issues between the deceased and the beneficiary that mean the latter is not happy to receive anything from the former, no matter what it is. Whatever the reason, is it possible to say no when a will is executed?
The answer is that if you inherit something, you can’t simply say you don’t want it and walk away. But there are other things you can do to ensure the money, property, or possessions don’t reach you.
One way to get around the problem is for the beneficiary to gift their inheritance to someone else – another family member. This could, however, still cause problems when it comes to inheritance tax or capital gains tax, so it may not be the perfect solution.
Another option would be for the beneficiary to completed a deed of variation, which would then alter the will so that another person receives the inheritance, or it is put into a trust if that makes more sense. Certain conditions must be met in order to do this, but it is possible.
Things become slightly more difficult when the will has provided for a minor, or even an unborn baby. This is because those who are affected by the will have to be the ones to request the variation. A minor can’t do that and neither, obviously, can an unborn child.
A deed of variation can significantly reduce your tax bill, and it can, if worked out correctly, allow for a large inheritance to be passed to the next generation without it needing to be a gift for which there must be a wait of seven years.
It is best to speak to an expert if you are considering this course of action.
Planning for IHT liability
Planning for IHT liability is absolutely vital, in order to ensure that your loved ones or chosen charities receive as much as possible from your estate, and the taxman as little as possible.
We cannot emphasise enough how important it is to start planning your estate right now. There are stipulated time periods within English law which have significant bearing on your estate planning and, should you leave it too late, you run the risk of ultimately increasing the amount of inheritance tax to be paid.
For example, the concept of "gifting" has long been recognised as an accepted means of reducing the value of your estate whilst you are still alive – thereby reducing inheritance tax liability after you've gone. Small gifts up to the value of £250 each time can be gifted to as many loved ones as you wish. In addition, a parent can make a £5000 wedding gift, a grandparent can gift up to £2,500 for their grandchild's wedding and anyone else, up to £1000. However, there is a condition attached to these gifts.
As the individual giving a gift to a beneficiary, you must then live for at least another seven years from the date of the gift, if the value of your estate is to be reduced by that amount. Should you not live that long, then your executor will be expected to pay a percentage of the whole IHT liability. This is known as Taper Relief. So, should you die within three to four years of making a gift, then 80 percent of the inheritance tax will be charged. Alternatively, between years six and seven, 20 percent will be charged.
From this then, it should be clear that you need to start planning for IHT liability well in advance. Any delay could cost your loved ones potentially thousands of pounds.
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