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The importance of a well-drafted will

Written by admin on . Posted in Lasting Will & Testaments, Law, Wills & Probate. No Comments on The importance of a well-drafted will

The risk of relying on homemade wills was highlighted in a recent case where a will was held to be invalid. Even a well-written will must be kept up to date given the possibility of future inheritance tax (IHT) changes.

Invalid will

While there is usually the presumption that the testator will have had knowledge of a will, and will have approved it, a will might be considered as suspicious if:

  • It is a homemade will;
  • It is created by a beneficiary;
  • It contains spelling mistakes;
  • It represents a radical change from a previous will; or
  • The relationship between the testator and beneficiary was not close.

In the case of Ingram and Whitfield v Abraham 2023, a homemade will would have seen Joanne Abraham’s estate inherited by her brother – who drafted the will – rather than her children who were previously the beneficiaries. The homemade will, which also misspelt Joanne’s name, was held to be invalid, therefore, her children inherited the estate.

Future IHT changes

 Although IHT reliefs have remained largely unchanged since the introduction of the residence nil rate band in 2017, future changes cannot be ruled out – especially with an election on the horizon.

 The Institute for Fiscal Studies has recommended that three IHT reliefs are cancelled:

  1. AIM shares: these shares are exempt from IHT, with AIM portfolios – including AIM ISAs – often used to avoid IHT.
  2. Business and agricultural property relief: although full abolishment might be politically difficult, relief could be capped.
  3. Pension pots: funds in money purchase pension schemes can currently be passed on to beneficiaries free of IHT.

The lesson here is to review your will regularly, even if it is well-written, because your circumstances, wealth and IHT rules could change.

The Government’s guide to making a will can be found here.

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Are we witnessing the decline of trusts?

Written by admin on . Posted in Lasting Will & Testaments, Tax, Wealth, Wills & Probate. No Comments on Are we witnessing the decline of trusts?

The number of trusts filing self-assessment tax returns for 2021/22 was 37% lower than for 2003/04. The decline comes as no real surprise given the eroding advantages of using a trust and the recent requirement to register trusts with HMRC.

Interest in possession trusts

Interest in possession trusts have seen the sharpest decline since 2003/04, with their number falling from over 100,000 down to just 44,000.

  • HMRC figures show that the decline in interest in possession trusts is mainly at the lower end of the scale where trust income is less than £10,000.
  • The inheritance tax (IHT) regime for interest in possession trusts from 2006 removed much of their favourable tax treatment. Such trusts are now subject to IHT on a similar basis to discretionary trusts, so, for example, a 20% tax charge can arise on a lifetime gift into an interest in possession trust.

However, interest in possession trusts are still commonly used in wills. Typically, a spouse or partner will be given rights during their lifetime (such as being able to stay in a marital home), with the capital subsequently passing to children – which is particularly important if there are children from a previous relationship. Such arrangements still enjoy a favourable IHT treatment.

Going forward

Trusts are more than ever becoming a specialist method of tax planning, and this trend is only likely to increase over the coming years.

Trust planning is still popular for those with a high net worth. Trusts allow wealth to be passed down the generations, protecting against marital breakdown, bankruptcy and family disputes.

There are reports that a future Labour Government would scrap business relief and agricultural property relief, and such a move would further limit the use of trusts. Trusts holding assets currently qualifying for relief could find themselves facing periodic IHT charges.

HMRC’s latest information on trusts (at October 2023) can be found here.

 

Inheritance Tax: Intestacy entitlement increased

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If an English or Welsh domiciled person dies without leaving a will, the amount that a surviving spouse or civil partner can inherit as a statutory legacy under the intestacy rules has – from 26 July – been increased from £270,000 to £322,000.

This statutory legacy only comes into play if the deceased also has children – the spouse or civil partner receives £322,000 and the deceased’s personal possessions, plus 50% of the remainder of the estate. The children receive the other 50% of the remainder. An exception applies where property is jointly owned. If there are no children, the spouse or civil partner will inherit the whole estate.

Example

Noah died intestate leaving an estate valued at £900,000. He is survived by his spouse, Emma, and two children. Emma inherits a total of £611,000 (£322,000 plus 50% of the remainder), and the two children will share £289,000.

Controversy

The statutory legacy is reviewed every five years, and the next review is due in January 2025. However, the five-year review period is overridden if inflation increases by 15% or more. The trigger point should have been December 2022, but inflation then fell in January 2023 before again going over 15%.

The 26 July uplift is therefore around seven months late, and some surviving spouses and civil partners will receive £52,000 less as a result of the delay. A House of Lords committee has raised the matter with the relevant authority, the Ministry of Justice, asking how such shortfalls will be dealt with.

Importance of leaving a will

The importance of leaving a valid will can be seen by looking at those who have no automatic right of inheritance:

  • Unmarried partners;
  • LBGT partners not in a civil partnership;
  • Relations by marriage;
  • Close friends; and
  • Close relatives other than children only inherit in certain circumstances.

The intestacy rules differ for those domiciled in Scotland or Northern Ireland.

The government has created an online tool to check who will inherit if someone dies without leaving a valid will. This can be found here.

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Getting in touch: HMRC’s new email facility

Written by admin on . Posted in PAYE, Stamp Duty, Tax, VAT, Wills & Probate. No Comments on Getting in touch: HMRC’s new email facility

Although there is no general facility to contact HMRC by email, it is slowly moving into the 21st century by providing the option to receive an email response. But of course, this comes with a few conditions.

Dealing with HMRC by post can be a slow process. With resources having been spread more thinly than ever due to the Covid-19 pandemic and Brexit, HMRC has only recently been working its way through the built-up backlog of post.

Scam risks

Scammers can use fake HMRC emails as a way of obtaining personal information, although, with improved scam email detection, they have now largely switched to text messaging. Nevertheless, HMRC points out the risks associated with using email. Their guidance raises various concerns:

  • Emails sent may be intercepted and altered.
  • Attachments could contain a virus or malicious code.

To reduce the risk, HMRC will desensitise information, by, for example, only quoting part of a unique reference number.

Confirmation

Anyone who would like to be contacted by email has to confirm to HMRC in writing by post or email that:

  • They understand and accept the risks of using email;
  • They consent to financial information being sent by email;
  • Attachments can be used; and
  • Junk mail filters are not set to reject and/or automatically delete HMRC emails.

HMRC should also be sent the names and email addresses of all people to be contacted by email, such as business owners, staff and the business’s tax agent.

Confirmation will be held on file by HMRC and will apply to future email correspondence, with the agreement reviewed at regular intervals to make sure there are no changes. The use of email can be cancelled at any time by simply letting HMRC know.

HMRC publish a list of recent emails it has sent out to help people determine if an email is genuine. This list can be found here.

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Confused on claiming residence band relief?

Written by admin on . Posted in Inheritance Tax, Lasting Will & Testaments, Wealth, Wills & Probate. No Comments on Confused on claiming residence band relief?

Working through inheritance tax (IHT) requirements come at a difficult time. The provisions of the residence nil rate band (RNRB), which can be passed on between deceased spouses and civil partners, has caused some confusion.

Any unused RNRB from the first death of a spouse or partner can be relieved on the death of the second individual. The claim is based on the value of the RNRB at second death, but some executors are mistakenly using the value at the date of first death.

The RNRB was introduced from 6 April 2017 at £100,000, increasing by £25,000 a year until reaching its current value of £175,000.

The claim for RNRB is made on IHT form IHT436, with the confusion coming from the entry at box 11: the value of the RNRB enhancement at the spouse or civil partner’s date of death. However, the actual claim is based on the value entered at box 14. This should be the value of the RNRB at the date of second death, although it is easy to see why mistakes are being made given the confusing wording used by HMRC.

HMRC does not seem to be picking up the error, so if a mistake has been made a correction will have to be made by writing to the Revenue.

Conditions and transfer

Unlike the normal IHT nil rate band, the RNRB comes with various conditions. It is only available:

  • At death (not against lifetime gifts).
  • Against the value of a home (only one property can qualify).
  • Where the home is inherited by direct descendants (including step, adopted and foster children).

Any unused RNRB can be transferred in the same way as the nil rate band, with a claim required within two years of second death. It doesn’t matter if first death was before the introduction of the RNRB on 6 April 2017.

The unused RNRB of more than one spouse or civil partner can be transferred, but the overall total cannot exceed one full RNRB (£175,000).

Detailed HMRC guidance on working out and applying the RNRB can be found here.

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Treasury sets aside CGT and IHT change agendas

Written by admin on . Posted in Capital Gains Tax, Inheritance Tax, Lasting Will & Testaments, Tax, Wealth, Wills & Probate. No Comments on Treasury sets aside CGT and IHT change agendas

Tax and Administration Maintenance (TAM) Day is a new phenomenon brought in by the Treasury to try and move away from the traditional all-in-one Budget. Following the first ‘Tax Day’ in March, the end of November saw another round of announcements.

The government set out steps to modernise and simplify the UK tax system, but of more interest is the response to the Office of Tax Simplification’s (OTS) reviews into inheritance tax (IHT) and capital gains tax (CGT).

Inheritance tax

The review into IHT had made various recommendations, particularly regarding exemptions and reliefs as these can be quite complicated. Given that the nil rate band and the residence nil rate band are frozen until 2025/26, the government has decided not to proceed with any IHT changes for the time being, although the door has been left open for changes in the future.

Reduced IHT reporting requirements from 1 January 2022 have already been announced, and the latest confirmation of the status quo will be welcomed by anyone who has recently undertaken IHT planning.

Capital gains tax

Wide ranging and more radical OTS suggestions on CGT, such as aligning the rate of CGT with income tax rates and significantly reducing the amount of the annual exemption, have been put on hold for now.

The time limit for reporting and paying CGT in respect of residential property disposals has already been extended from 30 days to 60 days. Other measures that the government intends to go ahead with include:

  • Integrating the different ways of reporting and paying CGT into a single customer account;
  • Extending the no gain, no loss window on separation and divorce; and
  • Relaxing the rollover relief conditions where land and buildings are acquired under a compulsory purchase order.

Although less definite than the above, the government will also review principal residence relief nominations and the rules for enterprise investment schemes; however, any changes are expected to be merely procedural in nature.

Details of the government’s response to both of the OTS’s reviews can be found here.

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Probate fees reform, round three

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The Government’s third attempt at revamping the cost of obtaining grant of probate in England and Wales is much more modest in scope than the previous two. The introduction of the new fee structure is planned for early 2022.

Proposal

There is a two-tier fee structure under the current system. The cost is £215 for an application from an individual, and £155 if the application is from a solicitor. Fees were last amended seven years ago, and at that time the cost differential reflected some of the additional administrative work required by the probate service to process applications made by individuals.

  • The cost differential between professional and individual applications has substantially reduced, so the latest proposal is to have a single fee of £273; considerably less than the £20,000 maximum suggested back in 2016, or £6,000 in 2018.
  • No fee is payable for very small estates of £5,000 or less.
  • The same fees apply for obtaining letters of administration where the deceased was intestate.

Probate

Many estates do not need to go through probate. In some cases the value of the deceased’s assets is low. The cut-off point can be anything between £10,000 and £50,000. Each bank and financial organisation has its own rules on how much money it will release before seeing a grant of probate. If all assets are jointly owned, they automatically pass to the surviving owners.

Even when probate is required, you can save the high fees charged by probate specialists if the estate is uncomplicated; approximately 40% of applications for probate are made by individuals in such circumstances. The Death Notification Service lets you notify a number of financial institutions of a person’s death at the same time, and My Lost Account will help trace lost bank and building society accounts, and also NS&I products. It is worth obtaining multiple copies of a death certificate from the beginning as the cost of requesting these later can go up.

Because of Covid-19, probate applications are taking up to eight weeks to process.

If you are involved in a probate application, the government’s guide is a good starting point, otherwise, give me a call.

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What is an adequate retirement income?

Written by admin on . Posted in Property, Wealth, Wills & Probate. No Comments on What is an adequate retirement income?

A leading pension think tank has examined this question – but the findings aren’t straightforward.

Over the years, there has been much focus on the tax treatment of pensions and ways to encourage greater saving for retirement. Arguably, there has been less attention paid to the question of how much income you will need once work ceases.

The Pension Policy Institute (PPI) recently published a paper examining what an adequate retirement income means today in dollar terms. The paper notes that the last serious effort to address the issue was undertaken by the Pensions Commission nearly two decades ago, leading eventually to the introduction of automatic enrolment. The PPI makes the following points:

  • Individuals, employers, the state and society generally all have differing views on what constitutes adequacy. For example, the state view is set by the Guarantee Credit element of Pension Credit (£177.10 a week for a single person and £270.30 for a couple).
  • Changes to the pensions landscape since 2000 have altered the retirement picture both positively and negatively. For example, the new state pension is higher than its basic state pension predecessor, but state pension age has increased (to 66 for men and women) and will continue to increase.
  • The demands made on assets originally saved to provide a retirement income have increased, for example:
    • For some people, there is a widening gap between leaving work and receiving their state pension, a situation exacerbated by pandemic-prompted early retirements.
    • More often now debts, including mortgages, will be carried over into retirement.
    • The shrinking of home ownership will see more retirees having to pay rent; and
    • There may be a need to support other family members – the Bank of Mum and Dad may not be able to close at retirement.
  • The traditional emphasis on retirement income ignores the need to deal with ‘personal financial shocks’, which are better addressed by considering retirement capital.

The PPI says that many people make their retirement planning decisions ‘without support’. It goes on to warn that “As a result, many people struggle to make pensions and savings decisions which offer them the best chance of both achieving their aspirations for retirement and protecting themselves against future risk.” Don’t let that be you – talk to us about assessing what an adequate retirement income means for you and how it can be achieved.

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Unhappy families – challenging inheritance issues

Written by admin on . Posted in Inheritance Tax, Lasting Will & Testaments, Wealth, Wills & Probate. No Comments on Unhappy families – challenging inheritance issues

The outcome of a recent High Court case is a warning for anyone challenging a will. 

As inheritances become more valuable, the number of disputes about wills have increased. Court cases rose by almost 50% to 188 in 2019 compared to the previous year according to the latest Ministry of Justice figures. Many more are settled or abandoned along the way. The cases which do reach the High Court tend to be those involving the ‘right’ mix of large sums and elevated emotions. An example that appeared in April 2021 is Miles v Shearer.

Tony Shearer died in October 2017, leaving nearly all of an estate worth about £2.2 million to his second wife, Pamela. His two daughters, Juliet and Lauretta, born in the early 1980s to his first wife, received nothing. This prompted them to make a claim under the Inheritance (Provision for Family and Dependants) Act 1975.

Lauretta wanted a payment from her father’s estate to cover:

  • The cost of a home, so that she could move out of her mother’s property;
  • Fees for training as a dog behaviourist, to enable her to support herself; and
  • The expenses of caring for her autistic daughter.

Juliet sought funds to:

  • Reduce her mortgage by about £245,000, so that it would become affordable for her on a repayment basis: and
  • Buy out her ex-husband’s share of a flat in which she was living – about another £100,000.

In 2008, shortly after his divorce, Tony gave £177,000 to Juliet and £185,000 to Lauretta. At the time he made clear there would be no further financial support to his daughters. This was an important factor in the case as it reinforced the decisions Tony made in the creation of his will.

The judge rejected the claims of both daughters, stating that neither had established a need for maintenance to be funded from their father’s estate. Two lessons can be drawn from the case:

  • Make your intentions clear in advance to try to reduce potential disappointment and the likelihood of legal action when a will is finally read.
  • Tony’s will achieved what he wanted to happen. Had he left matters to English intestacy laws, Pamela would have received only £125,000 and personal chattels outright, with Juliet and Lauretta immediately jointly receiving half the residue (less about £285,000 of inheritance tax).

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