Wills 1 Flashcards
Testacy
Deceased’s will covers their entire succession estate (testate)
Intestacy
Deceased has no valid will (intestate)
Personal representatives hold the undisposed property on trust w/ power to sell under s33 Administration of Estates Act (AEA) 1925
Partial intestacy
Will doesn’t cover entire estate
Result of poor will drafting
Will applied, intestacy rules applied to remaining property
Succession estate
All property owned beneficially at the date of their death and are capable of passing to their personal representatives via will or intestacy rules (not value of assets in trust they are beneficiary to as distributed by trustee unless power of appointment in will to determine distribution)
Types of property not passed to the succession estate
DMCs
Discretionary pension scheme benefits (nominations not binding on trustees, but often passed upon production of death cert.)
Insurance policies written in trust
(released on death cert. production)
1. s11 Married Woman’s Property Act 1882 (for spouse/children)
2. Expressly for nominated 3rd party
3. Into an existing trust for those named Beneficiaries
Statutory nominations- nomination of £5k or under to nominee in Friendly/Industrial/Provident Societies account
Property held as beneficial joint tenants
Some other beneficial interests under trusts/property held in trust (life interest trust not part of succession, vested remainder interest form estate (when remainder man dies it passes to their estate) )
Statutory order of entitlement to the estate s46 AEA
- D’s spouse/civil partner + issue (children (inc. conceived but unborn, step not included unless adopted) +grandchildren) highest ranking
- Spouse, no issue -> Spouse inherits estate
- Issue, no spouse -> Issue inherits estate on statutory trusts
- Spouse and issue -> Spouse gets personal chattels, statutory legacy of £322k (no tax/costs + interest from date of death to payment), half of any residue. Issue gets other half of any residue on statutory trusts.
- No spouse or issue -> relatives according to statutory order. Relatives other than parent/grandparent take statutory trusts.
Spouse entitlement to intestate estate
Dependent on Spouse surviving the deceased by 28 days (s46(2A) AEA) (if not no entitlement under intestacy, does not pass to their estate)
Issue entitlement to intestate estate- statutory trusts
s47 AEA
If they do not survive the deceased, their own issue may still inherit their entitlement under the ‘substitution limb’ of statutory trusts (contingent on reaching 18 years old)(e.g. passes to nieces/nephews when sibling dead)
If they do survive the deceased (no 28 day requirement), need to satisfy contingency limb before obtaining a vested interest (contingent until 18 yrs old, vested then on- inherit immediately)
Statutory order of intestate entitlement after spouse/issue
- Parents (Not on statutory trust)
- Whole siblings
- Half siblings
- Grandparents
- Whole siblings of parents (aunts/uncles)
- Half siblings of parents
- Crown : bona vacantia (ownerless)
Where more than 1 in each category, estate divided equally
Highest get whole entitlement
Residue calculation
Net estate - personal chattel value - statutory legacy (£322k)
Split between spouse and issue (if not, other relatives)
Personal chattels
s55 AEA - tangible movable property excluding money/securities for money, property used by intestate at death solely/mainly for business, property held at death of intestate as investment
Intestacy- distributing assets
Spouse- personal chattels
Statutory legacy and residue at discretion of personal representatives (as they see fit)
Intestacy- appropriation of marital home
Statutory right to appropriate home (Schedule 2 Intestate Estates Act 1952) if not entitled (deceased was sole owner/ tenancy in common)
Can buy property from personal representative using money received from estate (+ their own if not enough- home valued at date of appropriation not death)
Surviving spouse/civil part. must write to personal reps w/ 12 months of date of the grant (they can cannot sell in this period w/o spousal consent)
Consent of court required for some circs (part of building/farm/business premises)
Co-ownership
Legal title : Joint tenants
Beneficial title: Joint tenants/tenants in common
All sign and execute transfer deed.
No restriction on LR proprietorship register- assume jointly
Tenancy in common restriction (no disposition by sole proprietor…) - assume tenants in common (check if right restriction/converted from joint during ownership)
Death of joint proprietor
Legal title- right of survivorship -> LR registers survivor as sole legal owner but if tenancy in common restriction, LR leaves it in place unless owner proves they have full beneficial ownership too.
Beneficial title - joint tenant - survivorship applies, LR registers them as sole legal owner, no restriction on register
Beneficial title - tenant in common- surviving only has their distinct share, other passes to deceased’s beneficiaries under will/intestacy.
Co-ownership: Title investigation
Solicitor must satisfy LR that legal and beneficial title passed to buyer.
Surviving beneficial joint tenant selling must sign contract + transfer deed and provide certified copy of joint tenant’s death cert.
Surviving beneficial tenant in common selling appoints 2nd trustee (their solicitor) to sign contract + execute transfer deed with them and provide certified copy of joint tenant’s death cert, allows buyer to overreach beneficial interests (property transferred by at least 2 trustees, purchase price paid in good faith)
Requirements for Valid Will
- Testamentary Capacity
- Knowledge & Approval
- Formal Requirements/s9 Wills Act 1837
Testamentary Capacity (Banks v Goodfellow test)
- Understand the nature of the act
broad effects of will not every detail - Appreciate the extent of their property
not every item’s precise value - Are aware of moral claims against their estate
consider those nearest to them but no requirement to leave them anything - Are not suffering from insane delusions affecting the will
can still have capacity if unconnected with will
Low threshold to satisfy this test.
Testamentary Capacity Timing
Must have TC at time the will is executed
Parker v Feldgate exception- TC at time of instructing making of will -> will done according to those instructions -> understood that signing will for which they had previously instructed
e.g. TC fluctuates due to illness (dementia)/ unexpected event between instructions and execution (grief)
Golden rule: Testamentary capacity
Kenward- when taking instructions for a will from elder/seriously ill client, instruct a medical practitioner to make assessment of their TC (keep record)
Not duty but best practice - reduces likelihood of later disputes
Failure to comply doesn’t automatically show poor practice (practically difficult)
Testamentary capacity presumed where will is rational and duly executed
Presumption that client had capacity unless evidence otherwise then burden of proving capacity lies with executor of will demonstrate testator passed Banks v Goodfellow
Banks v Goodfellow test overrides general statutory test of capacity (Mental Capacity Act 2005) in conflict
Both should be considered
Client lacks testamentary capacity- cannot make a valid will, don’t accept their instructions
But -
court can authorise execution of a will on their behalf (if intestacy + in their best interests) (statutory will)
Will validity: Knowledge & Approval
Know and approve contents of will
Must be present at time of execution (unless Parker v Feldgate)
Presumed if testator had testamentary capacity + will executed according to s9 Wills Act 1837 unless testator blind/illiterate, signed by another, suspicious circumstances
Rare but presumption can be rebutted - burden of proof on those seeking to enforce
Can have TC but not K&A
No presumption of K&A: blind/illiterate, no English, signed by another, suspicious -> Affidavit of K&A
If not in attestation clause (explaining circumstances of will execution) then affidavit of K&A needed when submitting will to probate.
Will (or specific gift in it) made under undue influence will be invalid.
Only a part made under undue influence, rest may be valid as long as it doesn’t upset the tenor of what remains.
Requires evidence that testator was didn’t intend to make the will they signed (persuasion isn’t undue influence)- burden of proof on allegator’s evidence (fairness irrelevant, consider physical + mental strength of testator.)
Validity of Will: complying with s9 Wills Act 1837
- must be in writing and signed by testator (or someone else on their behalf) intending to give effect to will
- signature must be made/acknowledged w/ 2 adult witnesses with capacity present
- witnesses must each sign the will in the presence of testator (not necessarily presence of each other)
testator acknowledges to 2 witnesses that it is their signature (can be done after they’ve signed)
Attestation clause
“Signed by testator in our joint presence then us in theirs”
No legal obligation but raises presumption of due execution (s9 Wills Act followed)
If none/poorly drafted -> affidavit of due execution by witnesses
Amended in special circumstances (signed on behalf/blind/illiterate)- provide evidence of knowledge & approval (failure to do so can be solicitor negligence)
s15 Wills Act 1837
Any gifts to attesting witness or their spouse are void.
Document remains valid but beneficiary/spouse cannot inherit under the will (solicitor should notify them)
UNLESS at least 2 other witnesses not affected by s15 present or a properly executed codicil (then s15 disregarded)
Appointment of beneficiary as executor still applies even if s15 denies them inheritance.
Professional executor as witness- can still be remunerated for this role.
Structure of wills
Commencement
Revocation
Burial/funeral wishes
Appointment of executors & trustees
Appointment of guardians
Specific/general/pecuniary/residuary gifts
Administrative clauses
Date & Attestation
Commencement
Full name + address of testator/job
Any other names/nicknames known by (also confirmed in Grant of Representation) otherwise unable to administer all of estate
Date here/at end
Revocation
I hereby REVOKE all former wills and testamentary dispositions and declare this to be my last will
- Only 1 exists at a time (if there are more than 1, later one impliedly revokes earlier one where inconsistent/repeats earlier terms
- Valid without this
- Other methods for revoking will in whole/part: codicil, destruction, testator’s marriage/civil partnership/divorce, effective manuscript amendments. Most common is express revocation by later will.
Burial & Funeral wishes
I WISH for my body…
Not legally binding on personal representatives (PR) but will be followed where possible
Appointment of executors
- Role of PR is to collect the deceased’s assets -> administer the estate (s25 AEA 1925)
- PR pays deceased’s debts/administration costs + expenses -> distributes assets to the corrects beneficiaries
- PR appointed by will = executor (power to act derived from will)
- If will doesn’t appoint an executor, Non Contentious Probate Rules (NCPR) appoint PR -> administrator
- Minor/lacking mental capacity cannot act, unwise for bankrupt to act
- min. 1 (ideal 2), max 4 can apply for grant of representation (extra have reserved power until vacant spot)
- Testator should obtain consent from executor (onerous on grieving spouse)
- Appointment of spouse/civil partner ineffective on divorce (s18A/C Wills Act)
- Mostly absolute/unrestricted power but qualified appointment for time/location/type of asset possible (must ensure all of the estate is covered by an executor here) (grant of representation issued will be similarly limited)
- No doubt about who is appointed (void if unclear /ambiguous of who)
Appointment of executors + trustees clause
I APPOINT … and …. (hereinafter my trustees) jointly to be the executors and trustees of my will but if unable/unwilling I appoint … to fill any vacancy
Appointment of trustees
- at least 2 trustees, if trust arises
- can be both executor and trustee
- often family member + legal professional
Appointment of law firm partnership
I appoint the partners …
- partnership doesn’t have separate legal identity so instead all partners at the date of death appointed
- number of partners that can act can be limited (can express preference for specific partner but don’t personally appoint - may no longer work there)
- firm may change its name/merge/incorporate/LLP so use ‘partners’ for flexibility
Appointment of LLP/Trust Corporation
- Lots of law firms are LLPs (have legal capacity to apply for grant of representation + can be appointed executor
- Trust Corp- specific trustee + PR authority (law firms/banks may have their own with separate legal identity) can be appointed executor
- LLP/Trust Corp can be appointed sole executor/trustee
Appointment of professional executors
- Only professional executors/trustees may charge £ (s29 TA 2000) but some restrictions so professional executors/trustees (LLP/trust corp partners) include express charging power added to appointment clause
“Any Professional Trustee is entitled to charge and be paid reasonable remuneration” - Receiving payment under s29 TA/ express charging clause not a breach of fiduciary duty (profit/self-dealing/no conflict not applicable)
Appointment of Guardians
I APPOINT … to be guardians of any of my children not yet 18 on my death
- any testator with parental responsibility may appoint a legal guardian for their infant children by will (s5 Children Act 1989)
- appointment by 1 parent doesn’t take effect until after death of surviving parent
- consent from guardian should be obtained (not required to accept appointment)
- consider financial provision for guardian (legacy if they are appointed)
- consider joint guardians + if they’ll work together effectively
Administrative powers
Executor: administer the estate then done
Trustee: manage trust (continues for as long as trust exists)
If will includes express trust/ trust arises where executors can’t administer it all (contingent interests)- will is trust deed
consider administrative powers needed (from statute/common law/express in will)
If no express in will/intestate- statutory and common law apply
Express powers override default powers- can restrict/expand them, create new powers
Professionally drafted wills include express administrative provisions at the end after dispositive clauses (follow Society of Trusts + Estates Practitioners STEP provisions(
Date & Attestation
Attestation clause: circumstances in which will was signed
presence of 2 or more witness who attest execution - s9 Wills Act
testator commonly signs at end of will, attestation clause last to confirm their intention
Valid without this
Specific gifts
I GIVE…
- particular item owned by the deceased at the date of death (distinguished from other, similar property)
- identifiable or fails for certainty
- if testator doesn’t own it at death -> gift adeems -> beneficiary doesn’t get it
- alternative item/cash equivalent can taken if gift of original item not possible -‘or any such …’
Collections
All my … to be divided …
- Must be identifiable or fails for certainty
- for one/many- specify division, time frame, how failure resolved (executors decide)
Collection of chattels
- Chattels (personal possessions) included in their succession estate, use specific clause so they don’t form general residue
- Statutory def includes vehicles/modes of transport/pets but not money/business items/solely investment items (amend clause to include/exclude)
- Avoid conflict w/ collections clause -> chattels after in will, and only covers items not already given away
Specific gifts of land
- Joint tenants -> survivorship (sever if needed)
- Tenants in common -> included in succession estate, passes per will/intestacy (check rights of other co-owner)
- if T doesn’t mind if sold/wants sole beneficiary of residuary to receive it - no clause needed
- if not-> identifiable property (full address + registered title number) and alternative if no longer owned by T on death (specific alternative property given?)main residence on death?)
- Residence Nil Rate Band
- advice on repayment of mortgage/secured charge - who is liable
- if leaving property on trust - who has right to occupy/pay rent/veto sale/pay for upkeep
- if left to more than one person, clarify terms of their joint ownership
General legacy
- gift of different property (doesn’t fill as PR buys the specified property if not part of estate at death- check with T)
- most pecuniary legacies are general - I give £1000 to…
Demonstrative gifts (type of general legacy)
- often pecuniary - paid out of specified sum
- will not fail for insufficient funds in specified account -> if it no longer exists/is inadequate -> B entitled to rest of fund + balance as general legacy
Pecuniary gift
- money
- demonstrative or general
- written in numbers and words
Residuary gift
- gift of all of T’s property in succession estate not already disposed of
- substitution clause- any primary gift that fails -> residuary
- partial intestacy if not drafted well (equally rather than proportions, express substitution clauses, ultimate gift over- disaster clause)
- given directly to beneficiaries or form trust
- trust where : life interest/discretionary trust/ more than 1 person/contingent or minor interests
- clause should cover declaration of trust + terms of trust
- note funeral/testamentary expenses/ debts paid first
Date from which the will speaks - date of death
- property
- collections
contrary intention - ‘my’ -> date of execution of will (receive nothing if no longer owned at death + no substitution)
Date of which will speaks- people
Date of execution
if grandchildren etc. state expressly when that’s determined (execution/death/all including those not born) if not class closing rule applies, class closes when 1st beneficiary obtains a vested interest
later codicil updates will - people at time of that execution
Relieving provisions (who is liable for tax/charges/expenses/costs)
Inheritance tax: gift generally made free of IHT (IHT payable from residue as testamentary expense
Beneficiaries bear cost of delivery of item of property to them/ expenses incurred since death in preserving/upkeep unless gift ‘free of’ expenses/transfer
AEA- asset charged bears liability for payment - beneficiary must pay secured debt/charge unless otherwise stated (general debt paid out of residue- must be specific, not just general direction to pay but evidence can prove intention)- check mortgage protection policy (proceeds to pay mortgage or to estate or directly to lender/surviving joint owner)
Survivorship provisions
Beneficiary must merely survive testator (no more) to get gift (if not gift lapses)
Commorientes - die at same time, eldest died first but IHT sees as simultaneous deaths- taxed separately
Quick succession relief from double taxation
Express survivorship clause- must survive by specified period of time to get gift (28/30).
If 1 spouse has few assets, couple’s combined above nil rate band -> equalise assets if survivorship clause to minimise IHT
Gifts to issue (lineal descendants: illegitimate/legitimated/adopted not stepchildren unless express)
Individual (named) or class?
Vested or contingent?
What if beneficiary pre-deceases?
Class gifts
Children/grandchildren
Each member entitled to inherit
General class closing rule: class closes (no one born subsequently can qualify) when one member’s possession vests
If no contingency on vesting (reaching age) - class closes on date of death as long as one person satisfies condition (vestable in one person)
Make express to avoid confusion (esp for those born after will)
Vested interests
Vests if given outright/absolutely (no conditions)
Not about age (can give to minor absolutely) but held on trust until 18 (if M dies before 18 but after testator, it goes to M’s estate.)
16/17- if express provision can take money not on trust
Contingent interest
Vests when condition satisfied -> if not gift fails
Commonly used for:
- testator’s issue
- residuary estate
tax implications of vesting at age after 18
Lapsed gift
gift fails if beneficiary pre-deceases testator
pecuniary gift lapses -> residuary estate
residuary estate gift lapses -> full/partial intestacy
Substitutional gift
Given in attempt of gift lapsing (note another beneficiary- children, grandchildren )
Often for residuary estate to prevent intestacy
if no express substitution clause -> s33 Wills act
s33 Wills Act 1837
If no express substitution, applies to prevent gift lapsing where:
a) will has a gift to their issue
b) intended B dies before T, leaving issue and
c) issue of the intended B are living at testator’s death (given to them + shared equally unless contrary intention shown)
Also relates to class gifts to children/grandchildren but not to other gifts
Confusing when s33 applies but original gift contingent (does same contingency apply?)
s33 can be excluded by wording of will specifically
Charitable/unincorporated association gift
include:
- full name and address and registered number of charity
- registered charity status (IHT implications)
- express provision made for changing its name/joining another org/ceasing to exist/winding up
- who can give valid receipt (treasurer) without this all members/potential beneficiaries need to give receipt (impractical)
General charitable purposes = Cypres - gift given to another charity with a different purpose
Inheritance (Provision for Family and Dependants) Act 1975 (IPFDA)
- England has testamentary freedom
- Close relatives have no legal right to inherit but can make application to the court using IPFDA
- Court can make provision if reasonable financial provision hasn’t been made
Must be :
1. In jurisdiction of IPFDA
2. In recognised category of eligible applicants
3. Make claim in prescribed time limit
Jurisdiction of IPFDA
Only applies where deceased died domiciled in England and Wales.
Can only have 1 domicile at a time.
Domicile of origin: at birth, father’s if married, mother’s if not
Domicile of dependency: parent changes domicile, domicile of children under 16 changes
Domicile of choice: sever all ties with origin w/ permanent intention
Category of applicants IPFDA
- spouse/civil partner
- former spouse/civil partner who hasn’t remarried/ another CP
- Cohabited with deceased as spouses/civil partners for 2 years prior to death
- Child (inc. adopted)
- person treated by deceased as child of family (inc. step-child)
- any person £ maintained wholly/partly by deceased immediately before death (substantial contribution towards reasonable needs outside of commercial)
Time limits IPFDA
6 months after date of grant of representation made (can be done before grant issues)
Check online search or standing search form + fee at Probate Registry (renewable)
can be extended if applicant shows circs around delay, if negotiations started in time limit, if estate already distributed before claim, refusal would leave them without recourse, if they have an arguable case fit for trial
IPFDA Court
High Court or County Court
High Court
Family division: spouse/civil partner/cohabitee and no complex issues
Chancery division: other
Which property does IPFDA apply to?
Out of net estate including:
- normal succession estate
- any property deceased had power of appointment for but hasn’t exercised
- property deceased nominated by statutory nomination/gave by DMC (minus IHT paid by donee)
- deceased’s severable share of joint tenancy if ordered by court
- any other property disposed by deceased but made available by court’s anti-avoidance powers
Grounds for IPFDA claim
- deceased’s will did not make reasonable financial provision for the applicant and/or
- distribution of the deceased’s estate under intestacy rules fails to make reasonable financial provision for applicant
Reasonable: consider competing interests of applicant and intended beneficiaries and original wishes of testator
Court orders of IPFDA
Order deemed to be effective from date of death ( read back for tax)
- periodical payments
- lump sum
- transfer of property
- settlement of property
- acquisition of property for transfer
- variation of marriage /civil partnership settlement
- variation of trusts on which deceased’s estate held (will/intestacy)
IPFDA claims
- Did the deceased fail to make reasonable financial provision of the applicant?
- If so, what award should court make?
IPFDA reasonable financial provision
Objective- statutory criteria (not moral)
Spousal standard: financial provision as reasonable regardless of whether it is required for maintenance
All other claimants (maintenance standard): financial provision as reasonable for applicant’s maintenance (no statutory definition but not necessarily their actual standard of living)
Spousal standard can be extended where all 3:
1. former spouse of decease who hasn’t remarried or spouse judicially separated from deceased
2. divorce/dissolution/nullity/judicial separation within 12 months of death
3. no order for financial provision made/refused in ancillary procceedings (financial orders made by court on divorce etc.)
Section 3 general guidelines IPFDA
apply to all applicants and each factor has equal weight
a) financial resources/needs of applicant
b) financial resources/needs of other applicants
c) financial resources/needs of any beneficiaries of the estate
d) obligations+ responsibilities deceased had towards Bs + applicants
e) size and nature of net estate
f) physical/mental disability of any applicant/beneficiary
g) any other court considers relevant (conduct of applicant/B)
Financial resources + needs includes those likely in foreseeable future
Specific guidelines s3 - Spouses/civil partner IPFDA
a) applicant’s age/duration of marriage
b) contribution of applicant to welfare of deceased’s family (home/caring)
c) provision applicant expected to receive on divorce if couple ended relationship on date of death (not if judicially separated)
a + b= former spouses too
Specific guidelines s3 - Cohabitees IPFDA
a) age of applicant + length of cohabitation
b) contribution of applicant to welfare of deceased’s family (home/caring)
Specific guidelines s3 - child of deceased IPFDA
Must consider manner they expected to be educated/trained
If not child but treated as such must consider:
a) on what basis D maintained, length + extent of contribution
b) if D has assumed responsibility for maintenance
c) in assuming responsibility, did so knowing applicant wasn’t their child
d) liability of another to maintain applicant
Specific guidelines s3 - other applicant maintained wholly/partly IPFDA
- substantial £ contribution towards reasonable needs of person outside of commercial
a) length of time + basis + extent of maintenance
b) if, and to what extent, D assumed responsibility of maintenance of applicant
Step 2: what award should court make? IPFDA
- Quantum (amount received)
- Form of award
largely based on financial evidence
assess applicant’s current + future assets and liabilities and s3 factors (particular needs)
Not always what they would’ve received on divorce, no presumption of clean break/50%, outright interest in estate or life interest (continue living in family home/ D has children from other relationship to leave house to)
Can be subject to will/trust but argue its not reasonable financial provision (discretionary doesn’t guarantee anything, life interest depends on level of income produced vs needs)
Inheritance Tax
- paid on estate of deceased person (40%)
- applies to UK assets of UK resident taxpayers
- applies to worldwide assets of UK-domiciled taxpayers
- scope of IHT is broad to prevent avoidance by reducing value of estate in lifetime
Rates of IHT
Nil rate - 0% (£325k)
Lifetime rate- 20%
Death rate - 40%
IHT trigger events
- PET- Potentially exempt transfers
- lifetime transfers of value exempt unless transferor dies within 7 years - chargeable at death rate (40%) - LCT- Lifetime chargeable transfers
- lifetime transfers of value which are immediately chargeable to IHT at lifetime rate (20%)
- reassessed if transferor dies within 7 years - Death
- deemed transfer of all assets owned on death (IHT chargeable on this transfer)
IHT due on chargeable transfers (transfer of value)
Non-exempt transfer of value made by individual
Disposition resulting in immediate decrease in value of individual’s estate
Gifts/ transactions at undervalue (difference in £ is a gift) - anything with monetary value
Value depends on trigger event:
Lifetime- loss in value to donor
Death - market value of items in the estate on date of death
Nil rate band
Individuals have basic nil rate band (NRB) of £325k of chargeable transfer value on which no tax is due
Surviving spouse/civil partner can inherit the unused portion of basic NRB - transferable nil rate band (TNRB)
Additional nil rate band (£175k) of individual dead on/after 6 April 2017 if leaving family home to direct descendant - residence nil rate band (RNRB)
Surviving spouse can inherit unused portion of RNRB
Potential Exempt Transfer (PET)
- prevents giving away shortly before death
- transfer not chargeable at point it is made
- transfer becomes fully exempt if transferor survives seven years from date of PET
- if transferor dies within 7 years, PET fails -> chargeable transfer -> IHT
Lifetime Chargeable Transfer (LCT)
All lifetime transfers of value made by person into a trust on/after 22 March 2006
- LCT chargeable when made - IHT lifetime rate of 20%
- if transferor dies within 7 years, LCT reassessed to death rate of 40% using NRB at date of death
IHT : Death
Deemed transfer of all assets -> IHT
Property valued at price it might reasonably be expected to fetch if sold on open market immediately before death.
Taxable death estate not the same as the succession estate
40% of value above available NRB
PETs + LCTs made in 7 years prior reassessed
Cumulation
- prevents individuals reducing/avoiding IHT liability by making serial dispositions
HMRC considers the Cumulative total = total chargeable value of all chargeable transfers made in the previous 7 years
Cumulative total reduces NRB available for the transfer under consideration-
Available NRB = Full NRB - Cumulative total
IHT exemptions
Gifts to certain individuals/entities exempt - completely free of IHT + do not use up NRB
IHT relief
Gifts of some assets benefit from relief- where conditions met, amount of IHT payable is reduced (up to 100%)
Calculating IHT for failed PET/LCT
- Calculate cumulative total
- Identify value transferred
- Apply exemptions and reliefs
- Apply basic NRB and calculate tax
If calculated after death: - Apply taper relief
- Give credit for tax paid in lifetime
Calculating IHT on death estate
- Calculate cumulative total
- Identify assets included in taxable estate
- Value the taxable estate
- Deduct debts/expenses
- Apply exemptions and reliefs
- Apply RNRB (residence)
- Apply basic NRB and calculate tax
TNRB- transfer of basic nil rate band (to surviving spouse/civil partner- 9 Oct 2007 introduced (survivor must have died after this to receive TNRB)
PRs of surviving spouse claim (within 2 years of the end of the month of death/ 3 months of PR first acting if later) an increase in survivor’s NRB equal to the unused percentage of first spouse’s NRB
% of NRB sum on date survivor dies - benefits from increased thresholds over time
if NRB amount unchanged then unused amount and % the same
only available after surviving spouse dies (not for their chargeable lifetime transfers)
HMRC can extend deadline
If PRs failed to do in time, anyone liable to pay IHT can make the claim after dealing for PRs to make claim
Outliving multiple spouses TNRB
Claim TNRB in respect of all of them, subject to a cap of 100% of a full nil rate band being transferred (£325k-> never more than £650k )
Individuals entitled to claim TNRB from previous marriage/CP can pass this on to any subsequent spouse they have (capped to transfer of 100% of full NRB)
Separate claim for each TRNB- even if only 1 needed
PRs of surviving spouse can make claim for any TRNB deceased spouse was entitled to on death of previous spouse (if their PRs hadn’t already)
Residence nil rate band (RNRB) £175k (or value of deceased interest in property if less, can be combined with NRB)
Finance Act 2015, fulfils all:
1. Deceased died on/after 6 April 2017
2. Death estate included qualifying residential interest (QRI)
2. QRI was closely inherited by direct descendant
If part of QRI closely inherited but other part not- only the chargeable value of share closely inherited is taken into account when calculating RNRB
RNRB applies to death estate as a whole
RNRB on properties over £2million
Tapered withdrawal of RNRB for estates with net value (after debts, before exemptions + reliefs) of over £2million - reduction of RNRB is £1 for every £2 above £2million
No RNRB available at all for net estates of £2.35million or more (or £2.7million where a full transferred RNRB applies.
RNRB- Qualifying residential interest (QRI)
Residential property interest part of the deceased estate right before death
Where more than 1 property, PR nominates one as QRI
- interest in dwelling house which was deceased’s residence at some point including property they didn’t live in but intended to at the future
- dwelling includes garden/grounds
- doesn’t include rental investment property which the deceased didn’t live in
RNRB- closely inherited
Beneficiary closely inherits QRI if received by
- gift under will (specific legacy of home or taking whole/part of residue including it)
- intestacy
- survivorship
Unless exception applies, B with contingent interest doesn’t closely inherit - not receiving absolute interest
RNRB- QRI closely inherited by direct descendants
Direct descendants:
1) children, grandchildren, great… etc., adopted, step (if parents married), foster, guardianship
2) spouse/CP of children, grandchildren, etc.
3) widow/surviving CP of 1 who has pre-deceased the deceased as long as survivor doesn’t remarry before deceased dies
Does not include:
deceased’s siblings, parents, nieces, nephews
Transferring unused Residence NRB
where first of the couple to die
- did not own a QRI
- did not qualify for RNRB as they left their GRI to non-lineal descendant (such as surviving spouse)
Surviving spouse can only use if leaving QRI to direct descendant
- doesn’t have to be the same house
- can be increased by up to 100% (£175k +175k = £350k)
tapered withdrawal - amount of RNRB reduced by £1 for every £2 over £2m value of property
no RNRB for estates over £2.7mill
Residential NRB - downsizing
Full RNRB even if deceased didn’t have QRI on death (or QRI valued less than RNRB)
downsizing addition
- deceased gave away QRI/downsized to less valuable QRI on/after July 2015 (lost full RNRB)
- former home would’ve been QRI if retained
- direct descendant inherits the replacement QRI
Amount of addition = amount of RNRB loss because former QR no longer owned/ new QRI less valuable
PR claims within 2 years of end of death month- details of lifetime gift/sale needed
only relevant if no QRI in deceased’s estate/ value of new QRI after downsizing less than maximum RNRB
Never more than maximum available
Not relevant if no loss of RNRB as new QRI value os same/more
QRI not left to direct descendant
Maximum combined NRB - £1million
Basic NRB £325k
RNRB- £175k
Spouse’s unused NRB- £325k
Spouse’s unused RNRB- £175k
No IHT payable on death
RNRB covers whole estate not just residence
IHT lifetime transfers
- tax due on immediately chargeable lifetime transfer - LCTs only (20%)
- tax due as a result of transferor dying within 7 years of making a lifetime transfer (LCTs and failed PETs) - reassessed to 40% using NRB at date of death
- Calculating cumulative total
How much of NRB is available
All chargeable transfer made in 7 years before death
If failed PET in those 7 years, calculate cumulative total for that transfer by looking back 7 years before for LCTs (14 years before death)
- Identify value transferred
Disposition immediately decreasing value of individual’s estate
Lifetime transfers- reference to loss in value to donor at date of transfer - cash, same amount, other- value received by donee
- Apply exemptions and relief to get chargeable value of transferr
Spouse, charity, family maintenance, annual, marriage exemption
Small gifts allowance
Normal expenditure from income
Business property, agricultural property, taper relief
Annual exemption always for lifetime transfers - £3k per tax year not chargeable (can use the previous year’s too- £6k)
- Apply NRB and calculate tax
- Establish NRB value £325k, NRB for LCT is NRB at date of transfer
RNRB never for lifetime transfers
NRB to failed PET/re-assessed LCT is NRB at death - Reduce total NRB by cumulative total
- Apply 0% rate to remaining taxable estate up to total NRB
- Apply relevant rate to the rest - IHT due
LCT - last step- 20% rate
5 +6 - reassessed PETs or LCTs (made in 7 years before death)(not part of death estate)
Taper relief: reduction in amount of IHT due dependent on date of transfer - apply IHT on reduced value
no taper- 0-3 years before death
minus 20% - 3-4 years before death
minus 40% - 4-5 years before death
minus 60% 5-6 years before death
minus 80% 6- 7 years before death
Credit for tax paid in lifetime - when LCTs reassessed- deduct previous IHT paid after taper relief applied - pay balance to HMRC- if nil, none left to pay, if negative, no refund for lifetime payments
Calculate IHT - death estate
1. Cumulative total
Total of all chargeable transfers in 7 years prior to death
- Identify taxable death estate
Different to succession estate
Includes all property deceased was beneficially entitled to at date of date - property globally where UK-domiciles
- all jointly owned property (tenants in common share and deemed joint owner share tax liable)
- property subject to a reservation - gives away but reserves a benefit (legal ownership of holiday home given away) (GROB), avoid by ensuring they don’t get benefit/pay when they do
- DMCs
- statutory nominations (Friendly/Industrial/Provident Societies - max £5k each- money goes straight to nominee not in distribution estate but is part of taxable estate)
- some interests in possession trusts (created before 22 March 2006) (e.g. life tenant- capital taxable )
After 22 March 2006- Life interest trust created by will - immediate post death interest, capital value included in taxable estate
if new intervivos trust made in lifetime of settlor- on/after 22 March 2006- not included in taxable estate
Everything not specifically excluded is in the taxable estate +
- discretionary pension scheme payments (except those payable by right to deceased’s estate)
- insurance policies written in trust for 3rd party excluded
- remainder man of life interest trust
- Value the taxable estate
Generally- market value at the date of death
Quoted shares:
- stock exchange prices on date of death - lower of 2, add 1/4 of difference between the 2
Related property:
- if assets owned by spouses worth more when valued together (form a set) - proportionate share’s value of total
Joint property:
- land co-owned (JT or TiC), value of deceased share is reduced (10%) to reflect difficulty of selling share of property- not where married as related property , not chattels
- Deduct any debts
- Deceased debts/liabilities due at the date of death - money deceased owed
- Post-death debts/expenses- reasonable funeral expenses/tombstone
Other post-death payable from estate but can’t be used to reduce value of IHT liable estate (legal fees for probate work)
- Deduct available exemptions/reliefs
Spouse exemption
Charity exemption
Business Property relief
Agricultural Property relief
- Apply any RNRB
- Establish RNRB available (including any transferred)
- Apply rate of 0% to this amount
if any remains- 7.
- Apply basic NRB and calculate tax
- Establish value of NRB and any transferred NRB
- Reduce total NRB by value of cumulative total
- Apply rate of 0% to this amount
- Apply death rate of 40% to any left over
Exemption and reliefs for lifetime transfers only
Annual exemption
Family maintenance exemption
Small gifts exemption
Marriage exemption
Normal expenditure out of income exemption
Taper relief
Exemption and relief for death only
Woodlands relief
Quick succession relief
