Skipping a generation
If your children are wealthy, consider skipping a generation. Instead of leaving gifts your children, leaving the gifts to or for the benefit of your grandchildren to avoid increased inheritance tax being payable on your children's deaths. In this way the gift is only taxed once instead of twice before the grandchildren inherit it.
To skip a generation can also have income tax advantages if the grandchildren inherit before they become of age. The income tax advantage arises from the fact that if capital transferred to a child by a parent earns income in excess of £100 in any tax year, the income is taxed as if it were the parent's income, but income earned by capital transferred by a grandparent is treated as the grandchild's own income irrespective of the amount of the income, and if it does not bring the grandchild's income above the grandchild's personal income tax allowance, any income tax deducted from the income can be recovered on behalf of the child.
Gifts to spouse
You often hear the advice to “Give assets to your spouse, so that no IHT is payable”. On the face of it, that may seem to be a good idea, but that is not necessarily so. If your assets are likely to grow in value, it may be better to have the benefit of that growth accumulate in the hands of beneficiaries, even if some tax becomes due on your death. Of course, you may want to give assets to your spouse for far better reasons than to save tax!
Use exemptions and allowances
Carefully read the chapters on exemptions and allowances and make sure you use them to best advantage. There is no point in trying to re-arrange your life around some smart idea, when the Government actually allows you to reduce your IHT bill in particular ways.
Beware the capital gains tax trap!
A transfer of assets on death is not a “chargeable event” for CGT purposes. That means no CGT is paid on your assets when you die.However, the value at the date of your death is the new "base value". The next "chargeable event" is likely to be the sale by either th executors, or later by trustees, or by a beneficiary. So a beneficiary will -pay CGT not only on the gain arising during his ownership, but on the additional gain which arose while the asset was in the hands of the executors. An increase in value while an asset is in the hands of trustees is covered by separate provisions relating to trusts. Beneficiaries should therefore beware of a bigger bill for CGT that they might have expected.!
Use a determined valuer
One good way to minimise the IHT bill on your death is to choose executors who will not roll over to have their tummy tickled when the District Valuer places a value on any real property sold or transferred out of your estate. District valuers profess to be neutral, but when it is your money they are taking, it pays to fight for the value you want.
Consider 2 year discretionary trust
Where the testator wishes to give their beneficiaries maximum flexibility in the way in which their estate is distributed, it is not uncommon to see the whole estate, or at least an amount equivalent to the nil-rate band, left on discretionary trusts. Where the trustees subsequently make a distribution of the trust property, the law operates as if the will had provided that the on the testator's death, the property had passed according to the distribution.
A power of appointment under a will is vested in the executors/trustees as from the death, and is exercisable over all residue, whether ascertained or not, unless, as a matter of construction, the will clearly demonstrates a contrary intention.
Consider nil rate band discretionary trust
If you give money or other assets up to, but not over the nil rate band current at the date of your death (and of course now unknown to any of us), no IHT will be payable on that gift. Of course, the rest of your will has to drawn carefully to make sure it is this chunk of your estate that carries the full benefit of the nil rate bands, and not some other part.
The benefit of this is that your discretionary trustees can accumulate assets in the trust at far lower tax rates than the beneficiaries would themselves pay if the assets were in their hands. If for example, an NRB trust was created by your will, leaving only assets you specifically wanted to leave to your spouse, then no IHT would be payable on your estate at all.
Your discretionary trustees can be guided as to your wishes by an informal letter of instruction in which you set out what sums you would wish to be given to whom and when. However, it is always a mistake to try to plan your business from your grave in too much detail.
Deferred valuations generally
The District Value is a branch of Revenue and Customs. It is staffed by professional valuers with the same training as property valuers in the private sector. When you submit any form to Revenue and Customs which involves a statement of the value of real property, they will pass it to the DV’s office to agree (or disagree) the valuation you have made. You have no obligation to declare values or have valuations made when such a valuation does not affect the tax due.
However, the more distant is time is the relevant date applicable to a valuation, the more the figure is estimated. So, briefly, the use of a trust may generally defer valuations, and so provide more “flexibility” when the time to agree figures comes around.
Other important drafting points
Your correct name and address
Simple mistakes can cause untold work, worry and expense. Make sure you:
- Give your full real names;
- Mention your nickname if many people know you only by it;
- Do not abbreviate a name, like Dick for Richard;
- If you may have assets in a name which is not your true name, (ladies - like the name of a partner whose name you use for convenience) mention that as “also known as”;
- If you have the same name as your son or father, make sure it is clear which of you is writing the will!
- Correct names and addresses of your beneficiaries
As for your own name, incorrect or confusing descriptions or names can cause untold anguish and expense. Describe beneficiaries by their relationship to you, their full name and their address, for example: “My niece Annabel Robinson of 44 Acacia Avenue, Upper Downtown, SP56 4QX.” This will help your executors to contact them easily and immediately.
If you make gifts to a group which may not be complete, like your grandchildren, then the Law will provide for inclusion in that group of all those grandchildren living at the date of your death, (or born within 9 months of your death). If this is not what you want, you can specify names or provide a cut-off date for their birth or other qualification for membership of your group.
Blood is thicker than water
The Law provides for any group defined by relationship to include members who are in that group through adoption or who are technically illegitimate. It is not only that beneficiary who is affected by this rule. It applies also to any person whose membership of the group relies on adoption or legitimacy of some other person, such as a parent.
Step children and relatives by marriage are not taken as being included in a group. If you want to include your wife’s niece, you will have to say so. Of course, the circumstances of the relationship with you may make it possible for such a person to apply to court for “reasonable provision” under your will under the Inheritance (Provision for Family and Dependents) Act 1975.
Describe gifts
For similar reasons, you should also describe your proposed gifts precisely. Any vague term is likely to be void. Make sure you identify which item when you have several of the same basic description, such as cars, horses or antique chairs.
Gifts to executors or trustees
If you wish to leave a gift to your executor or to someone who is a trustee under your will for their own benefit, state that the gift is given to them 'absolutely'. That makes clear that they do not hold the gift as trustee for some other beneficiary.
Gifts to witnesses
A gift to a witness is void. There is no way you can make it valid. Be sure to have people witness your will who are not potential beneficiaries.
Use of codicils
Before the days of word processing, it was expensive to change a will. Lawyers therefore made amendments by one or more codicils. A codicil is a note of the change, witnessed exactly like a will. Today, a codicil is rarely used and may confuse your family and executors. Do not use.
Date of your will and revocation of earlier wills
Every time you make a new will, you automatically make any previous one void. You do not have to include the eternal words “Last will and testament” to effect this. It is the law. So, even if you have left wills scattered all over the place, only the latest is valid. So the important feature is to date the will currently and to make sure your executors either know about it, or, better, will find it easily when you die. It follows that you do not need to revoke a former will. Nonetheless, as a “belt and braces” precaution, most will precedents do provide for this. Do remember that if you have assets in some other jurisdiction, then a will made earlier and providing for those assets may not be revoked by a later will which does not.
Beneficiaries who die before you and gifts to charities
It often happens that a beneficiary dies before you do. When that happens we say the gift “fails”. If you make no provision for it passing to some other person, then one of three things happens, depending on the wording of your will. I will deal in turn with each.
- It may be distributed according to the rules on intestacy;
- It may be a gift to charity. Charity is strictly defined in law as: the relief of poverty, the advancement of education or religion and other purposes beneficial to the community;
- Gifts to a charity do not necessarily fail even if it become impossible to carry them out. Let us suppose you make a gift to a charity whose purpose is to find a cure for stomach cancer. Now, before you die, a cure is found. Because the gift shows a “general charitable intention” a court will order that the gift shall be used for the benefit of other charitable causes as similar as possible to those you intend;
- If it is a gift to your child or other descendant, section 33 of the Wills Act will apply so that the failed gift passes to or among the descendants of your deceased descendant.
How to avoid this problem
You can cover this problem in one of two ways - or both. You can make specific provision for a “gift over”, that is to say a gift to some other person if that fails. Alternatively, you can simply be aware that a gift might fail and satisfy yourself that the people who will share your residuary estate are those to whom you would like to leave the failed gift anyway. Another alternative is of course to make a new will each year so that it is never out of date.
Second husband / second wife?
Even the most generous people balk at the prospect of their hard earned cash being spent by unworthy relatives of their second (or third!) spouse.
Even for a first marriage there may be a problem if your spouse re-marries after your death and your money is inherited by people you have never met.
Similar complications arise when the will make wishes to provide for children of an earlier marriage as well as a current spouse and a newer family. Sometimes there are just too many people who want a cut of the cake.
First, let me say that it is virtually impossible to get it completely right - even if you plan to die tomorrow. You just have to accept that you are doing the best you can. Here are some ideas which may help:
Owning property abroad
Your executors will need to take out a separate application for a grant of probate in any country in which you have assets. Of course, moveable assets like jewellery can be treated as belonging where you happen to keep them. Property in respect of which they have taken out a grant does not have to be included in their application for a grant in England. But beware other tax angles of repatriation of money and profits. Obtaining a grant is one thing. Bringing the family ranch back home to England may be quite another!
Validity of foreign will
English law will accept a will as valid made if it was made:
- In accordance with the law required by the country where it was made; or
- In accordance with the law required by the country, when the will was made:
a. Where you were living; or
b. Where at your death you were domiciled or had your habitual residence or Of which you were a national.
Leave a life interest
Most people think it fair to leave your interest in your home to a long-standing wife/husband or partner. A lesser alternative is to leave such a person only a life interest. A life interest is just what it says: the asset concerned is help in the name of trustees, usually your executors, for the ”tenant for life”. They have to balance the interests of the life tenant for income and the ultimate beneficiaries for capital.
For example, you could leave a life interest to your spouse or partner, then to others (your children?) only after he/ she dies.You can make a life interest out of any asset - a house, furniture, shares. But it is most usual to create a life interest because the life tenant needs the income or comfort of it. The most usual items to leave on trust for life are therefore a house or money or financial instruments like shares which provide an income.
If you leave a life interest in the house in which you both now live, remember to check that 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 racehorse 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.
Discretionary trusts
We have already discussed trusts to some extent. All I say now is that a discretionary trust allows your discretionary trustees to hold property and distribute it according to their understanding of your wishes. You can write a letter to them and leave it with your will. In such a letter you can explain the principles you would like them to follow. You can even give examples. Your letter has to force of law but it is likely that your trustees will take account of what you have asked them to do.
How are your debts to be paid?
When we consider how we want to dispose of our money and possessions, it is easy to overlook the facts 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 judgement 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.
You 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. 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 £600,000, excluding your half share of your home. You want to leave £300,000 to your wife and £75,000 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 £100,000 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, £120,000 in inheritance tax. Then the four children take £75,000 each. That leaves only £80,000 for your wife and not the £300,000 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.
Mortgaged property
The basic rule is that debts secured on property must be paid out of that property unless you say specifically to the contrary in your will.
Attestation clause
This is the name of the paragraph at the end of a will, usually in time proved words to provide compliance with the Wills Act.
A “side letter”
No document can be relied on in a court of law which is not executed as a will. However, it is often useful to leave close to your will, a side letter explaining details of some aspect of your affairs which may assist your executors. This is done most often in connection with the operation of a business, when the will maker can give comments and suggestions relating to staff and management.However, you are not limited in any way, in what you can say in such a letter.
Conditional gifts
It is perfectly possible to make a conditional gift - such as a gift to someone on achieving a qualification or some other identifiable target. Your executors will hold the gift as trustees until the beneficiary either does or does not achieve your target.It is always best to provide a time frame and an alternative beneficiary in these.