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Wills – how to make your plans heir tight!

Posted on 02/12/2020

Making a will conjures up a picture of a corpulent Dickensian lawyer sat at his large desk with quill pen in hand – and this would not be far wrong in that not much has changed since Mr Tulkinghorn strode menacingly through the pages of Bleak House, with 21st century reform still in the pipeline and well overdue. To make a will valid it must still be signed by the testator in the presence of at least two witnesses, who must also sign at the same time.

Recent events have made many of us more conscious of our own mortality so this is an appropriate time to take a look at the whole subject of wills, inheritance tax planning and associated matters. We hope that this feature will act as a good overall guide and prompt to those who keep thinking “I really should get around to making a will soon”!

Why should you have a will?
According to a survey by Will Aid, 47% of respondents had not made a will, with those in the 45-54 age bracket being the biggest culprits. There were lots of excuses with over 50% saying they had simply not got round to it, almost a fifth saying they were too young and 12% saying that it was unnecessary or they didn’t want to think about it.

But if you have substantial assets then not having a will could have disastrous consequences to the family you love, if the worst should happen. Leaving no will would make everything so much more difficult and may well lead to the estate being divided in a way which the deceased would not have wanted.

What happens if you don’t have a will?
If you die intestate (i.e. you have left no will) and you have children/grandchildren then the your partner will inherit:
• All personal property
• The first £270,000 of the estate
• Half of the remaining estate

Surviving children inherit the other 50% (in excess of £270,000) in equal proportion.

You may feel the above isn’t too bad but it’s important to take note of the following:

• Married or civil partners can inherit but if you are simply cohabiting partners (sometimes wrongly known as “common law” partners) then you can’t inherit under the rules of intestacy

• All biological children inherit equally regardless of whether their parents were not married or had not registered a civil partnership

• There would be no opportunity for close friends or relations through marriage to inherit

What should you consider in making a will?
Whilst it is possible to draft your own will or to use a cheap will writing service it is wise, particularly if your estate is of any substance, to use a solicitor who specialises in estate planning in order to ensure that the will is properly drafted and that you also take advantage of a number of tax planning opportunities – an area where your Clarkson Hyde adviser can also help. Initially you need to consider whether you would prefer a fixed or a discretionary will:

• A Fixed Will is the more traditional approach. The document will be set out along conventional lines with perhaps a few specific legacies and then instructions as to how the rest of your estate is to be dealt with.

• A Discretionary Will can be a more flexible approach. In effect, the will simply creates a trust to be administered in such way as your executors see fit. Whilst in theory that gives them carte blanche to deal with your estate, in practice the will is accompanied by a Letter of Wishes which sets out clearly what you want to happen with your estate. This approach has a number of advantages over a fixed will. People can be quite lazy about updating their wills to take account of changing family circumstances whereas with a Letter of Wishes the executors can have due regard to everything that is up to date and relevant. They can also have regard to the tax consequences in the light of frequently changing legislation.

Once you have decided to approach the subject of your will with a lawyer there are a number of matters which it can be helpful to consider, and possibly notify in advance, in order to save time, costs and assist with and simplify the will writing process:

• Is there an existing will – it should be scrapped to avoid the risk of confusion or reversion if a later will is successfully challenged. And don’t forget that marriage revokes a will – some people remarry oblivious of this

• Who should be your executors? There needs to be only one but it is advisable to have at least two – the maximum appointed to act by the Probate Registry is four. These should be family, friends and/or professional advisers who know you and your family circumstances well and who you trust – particularly if you have a discretionary will

• Provide an outline of your family – names, ages, where everyone fits into the family structure

• Think about your funeral arrangements – do you want to be buried or cremated – well “want” probably isn’t the right word but it will save your family having to make the decision!

• What is the value of your estate? – list out all of your main assets and liabilities

• Do you have any other expectations which could impact on your estate – a rich, distant aunt who may leave you a million or two!?

• Do you have any personal/sentimental items which you would like to leave to an individual or any specific bequests?

• How would you like the remainder of your estate to be divided – if some is to children at what age would they be responsible enough to have access to the funds?

• If you have a spouse then should you write “mirror” wills?

• Should you ask the solicitor to draft a Lasting Power of Attorney at the same time? This allows for your affairs to be easily administered by family or friends who you trust if you become physically or mentally incapable – don’t think that just happens to old folk, look at poor Michael Schumacher

Tax mitigation
Inheritance Tax is second only to Stamp Duty in its inherent unfairness. With Stamp Duty there is no income or gain to tax and it is a straight government cash grab on a transaction – and IHT is a further tax on all that you have been prudent enough to save from your taxed income or gains over your lifetime. In many other countries, such as Australia, Canada and New Zealand, there is no tax on death – even Russia and China don’t tax the dead, but here in the UK ……! Mitigation is a lengthy subject in itself and we won’t go into great detail in this article – however a few facts and pointers may be helpful:

• There can be the feeling that Inheritance Tax only applies to the very rich but without proper planning your heirs can be faced with the punitive rate of 40% tax on your whole estate after the relatively low £325k nil rate band – in 2018/19 Rishi Sunak helped himself to £5.3 billion of taxpayers’ money from beyond the grave – and right now he’ll be looking for any way possible to fill his coffers

• Married couples fair somewhat better than single folk in that the nil rate band is transferable between spouses/civil partners (effectively a nil rate band of £650k) and there is also a main residence transferable allowance which started at £100k in 2017 and is being increased such that by 2020/21 it will be £175k – in simple terms this means that a married couple will be able to leave a property worth up to £1m without any IHT

• Remember that there is no IHT when you inherit from a spouse or civil partner and no tax on lifetime transfers of assets between them either

• If you’re somewhat long in the tooth consider gifting some of your estate. In addition to the rather paltry allowance of £3k per annum there are larger exemptions if you are wealthy enough to make bigger payments out of income and, however large the gift, it is IHT free provided that you survive the gift by seven years (there’s a sliding scale if you peg out sooner) – of course you can’t give everything over £325k away as you will need to keep enough to live on

• Consider putting assets into a trust – perhaps for your children to benefit when they reach 18 – this is a relatively simple way to take assets out of your estate for IHT

• Also consider a whole of life policy written into trust – this can be an effective way to provide funds outside the estate to help meet the IHT bill

• If you own shares in a private company then it may be wise not to sell them prior to your demise as most private company shares rank for what is known as Business Property Relief. This is a potentially massive relief, ironically brought in by Denis Healey in 1976 – the Labour Chancellor who once boasted that he would “tax the rich until the pips squeaked”. He would turn in his grave at the thought that estates of £5m, £10m, £50m or more could pass tax free due to BPR! The original aim was commendable – to stop the break-up of private companies which would otherwise have to be sold to pay IHT. However, a word of caution – the relief is so generous that when the government looks for ways to pay for furloughing, job retention bonuses, the self-employed support scheme, etc this may be an area of attack

• Shares in most AIM listed companies qualify for BPR (once they’ve been held for two years) and can be an ideal way of building up a pot of capital in your estate, funds which can be there for a rainy day but can subsequently be passed IHT free if not needed

• Be charitable! Anything left to charity is IHT free and if you leave 10% of your estate to charity then the rate of IHT reduces to 36%

• If you have a particularly valuable property then you can consider equity release in order to raise cash to reduce your estate – by spending or by gifting the cash

The benefits of professional advice
Whilst you can draft the will yourself or do it “on the cheap” there is nothing like obtaining the right professional advice from a good solicitor and accountant in order to draw up the will properly and to mitigate this most pernicious of taxes. The choice of a skilled solicitor who specialises in wills is particularly important. With large sums involved, wills are frequently challenged by beneficiaries, dependants not named in the will, people the deceased made verbal promises to, or for all sorts of other reasons. The challenges could be on various bases, such as the testator lacking mental capacity, undue influence, lack of valid execution, the will is fraudulent or forged. There are a whole host of reasons and the best way to protect those who you really want to benefit is to use a good solicitor.

For further help with IHT planning, please contact Malcolm Coomber or your regular contact at Clarkson Hyde on 020 8652 2450.