Life interests, debts and taxes
About this series of articles
This article is one in a series about how to write a will, combining explanations of legislation with practical considerations for when you write your will. We hope that it is both thorough but also easy to digest.
A life interest is exactly that, a beneficial interest during a lifetime, but not ownership.
To create a life interest, property is transferred to trustees who hold it according to the instructions contained in the trust deed (in this case, your will) during the life of the beneficiary.
Your will also says what you want to happen after the life beneficiary dies. That later gift is called a gift over and the people who receive it are known as the remaindermen.
Tenant for life
If you do not want to give your interest in your home (whether all or part) to your spouse or partner, then you could give him or her a life interest. The most common reason to give a life interest is to make sure that the gift remains in the family and doesn't pass to an outsider accidentally. They are also used to bypass ownership of assets without removing the benefit of use.
A life interest makes the beneficiary a tenant for life. The word tenant here has no connection with the usual meaning, as an occupier for rent, but rather simply someone with an interest.
Property law is such that when two or more people hold property jointly (as tenants in common), 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.
Duties of trustees
One of the most important duties of a trustee is to balance the interests of the life tenant in the income of the trust 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 (in the 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. Read this article for more information about trusts.
The Trustee Act 2000 sets tight limits on what a trustee may or may not do in the management of a trust fund. That is to protect beneficiaries, particularly in circumstances that arise by operation of law rather than by will. However, when you make a will, you appoint executors and trustees who are well known to you. They are most likely beneficiaries too. So they need to be able to manage the money you leave in the best interests of the family - as you would wish.
So Net Lawman wills provide a recommended menu of very wide powers. In combination with a letter of intent you have considerably more control over your affairs.
Today, life interests are probably made most commonly to provide for a spouse for his or her life, with the gift over to your children, of whom he or she is not the other parent. This situation is common and is often the reason for making a will. Several Net Lawman last will and testament templates cover this.
Does the life tenant have enough money?
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 the 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 or 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 that 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.
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 HM 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.
Your executors cannot avoid the debts, so the best you can do is to allow for the possibility of them 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.
As an example:
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 be made 'after payment of tax'. However, you then lend £400,000 to your friend, whose business fails so that 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.
The nil rate band
Every estate has the benefit of an exemption from inheritance tax of the first lump of money. Today (2016/17) that is £325,000 but it may change next year and be very different at your death. This exemption amount is often called the nil rate band. So using the nil rate band to your advantage is not rocket science nor is it immoral. The proposition is very simply: you can save IHT by specifying in your will that the 'value' of the NRB is given to beneficiaries whose gifts would otherwise bear tax at the highest rate, leaving the rest of your estate to a spouse, whose share pays no IHT.
A refinement is to make sure any asset which is subject to a concessionary lower rate, is not placed in a gift of the NRB, once again maximising the advantage of the NRB. We provide more detailed advice on the IHT nil rate band.
We recommend that you read about how to make sure your children are provided for next.
We believe that every adult should make a will. So as to encourage you to do so, we provide some of our more straightforward wills (likely to be suitable for most people) absolutely free with no catches or conditions.
We offer nine templates in total that together cover thousands of possible variations of wishes. There will be one to suit your situation.
If you are in doubt as to which to choose, this article will help you to decide exactly which suits you best.
Please note that the information provided on this page:
- Does not provide a complete or authoritative statement of the law;
- Does not constitute legal advice by Net Lawman;
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