Your will: explaining life interest, debts and tax

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Your will: explaining life interest, debts and tax

A life interest
If you do not want to give your interest (whether all or part) in your home to the person with whom you share it, you could give him / her a life interest in your share. That makes him / her a “tenant for life”. Note: that has no connection with the usual meaning of the word tenant, as an occupier for rent.

Property law has it that when two or more people hold property jointly, the share of a person who dies passes automatically to the other of them. If you do not want that to happen to your share, you should sign a simple piece of paper to “sever the joint tenancy”. Give the other person a copy and make sure you have evidence of having given it. After that the law regards you as owning a “divided share” which will pass under your will or intestacy.

To create a life interest, property is transferred to trustees who hold according to the instructions contained in the trust deed - in this case, your will. Your will also say what you want to happen after the life tenant dies. That later gift is a “gift over” and the people who receive it are “remaindermen”.

One of the most important duties of a trustee is to balance the interests of the life tenant for income and the ultimate beneficiaries for capital. They must do this in accordance with the powers and instructions given to them under the terms of the trust / will. You hope they will also take careful note of the letter of intent which you have drawn and left for them with your will.

Today, life interests are probably made most commonly to provide for a spouse for his / her life, with the gift over to your children, of whom he / she is not the other parent.

If you leave a life interest in the house in which you both now live, consider whether your spouse or partner can afford the upkeep. You can leave money outright for this, or rely on the tenant for life having sufficient income, or you can add to the trust of the property, further money or income producing assets. Of course, the trustees could always sell that house and buy a less expensive one, leaving cash over to run it. You do not have to specify such things. Your trustees have wide powers if you use a Net Lawman document.

What if he/she marries again? You can provide for a life interest to terminate on re-marriage, though some people may find that proposition to be distasteful.

Assets which produce no income: If you have a stamp collection or a vintage car, there is little point in leaving it to an older person who will have no income benefit from it but who will pay IHT on its value when they die.

And your debts and tax . . .
When we consider how we want to dispose of our money and possessions, it is easy to overlook the fact that our estate will also have debts. At the very least, we may owe money to Revenue and Customs for income tax and inheritance tax. Most people leave a mass of minor household and other debts too. Occasionally, far lager debts are incurred, such as a judgment in a legal claim or a business loan. These are rarely anticipated when the will was made and can seriously disrupt your intentions when you made the will.

Your executors cannot avoid the debts, so the best you can do is to allow for the possibility of their being greater than you can now envisage. This boils down to making sure that the debts are not borne exclusively by a small proportion of your estate, but rather that all beneficiaries share them. In general, that means making sure that you work on percentages of your estate in preference to large fixed sums as specific gifts. If you do use large fixed sums, make sure you specify that each is to pay its own share of debts and expenses. Let me be more specific:
Suppose you have an estate of £1,600,000, excluding your half share of your home. You want to leave £800,000 to your wife and £200,000 to each of your four children by an earlier marriage. You decide to do this in a will in usual form which says that all gifts of money are to made “after payment of tax”. However, you then lend £400,000 to your friend, whose business goes pear shaped and you cannot recover your money; When you die, the tax rates have increased, so you pay, say, £520,000 in inheritance tax. Then the four children take £200,000 each. That leaves only £280,000 for your wife and not the £800,000 you estimated; The basic law is that unless you state otherwise in your will, inheritance tax in respect of lifetime gifts made less than seven years before you die and inheritance tax on joint or foreign property is borne by the person who receives the property or gift and not by those who inherit your residuary estate, but tax on any other kind of property is borne by those who inherit your residuary estate. If you require it to be otherwise you must say so specifically in your will.

Related documents: power of attorney - legal wills - general power of attorney

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Do not provide a complete or authoritative statement of the law;
Do not constitute legal advice by Net Lawman;
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Do not form part of any other advice, whether paid or free.