Wills Flashcards
For a valid will, what must a testator have?
- Capacity at the time the will was made
- Intention to make a will
- Executed the will in accordance with certain formalities
What age must a testator be in order to make a valid will?
18+ (with capacity)
Those aged 16-17 can make a privileged will
What is the statutory test for capacity under the Mental Capacity Act 2005?
A person lacks capacity if, at the material time (time of signing the will), the person is:
- Unable to make a decision for themselves
- Because of an impairment of / disturbance in the functioning of the mind or brain
What is the case law test for capacity (Banks v Goodfellow)?
To have sufficient capacity, the testator must have understood (at the time of execution/signing):
- The nature of their act (that they were making a will)
- The extent of their property
- The claims to which they ought to give effect
When is the ‘material time’ for capacity?
When the testator signed the will
Are there any exceptions to the ‘material time’ for capacity?
Sometimes, testator will not have adequate capacity at the date of execution, but has sufficient capacity when giving instructions.
If the will was prepared in accordance with those instructions and, at the time of signing, the testator understood that they were signing a will for which instructions had previously been given, the testator will be deemed to have acted with capacity
For a valid will, what two types intention must a testator have?
A general intention to make a will
A specific intention to make that particular will
What is the rebuttable presumption of knowledge an approval?
If the testator had the required mental capacity, then they acted with the requisite knowledge and approval
When does the presumption of knowledge and approval not apply?
- When the testator is blind / illiterate and the will is signed on their behalf
- When there are suspicious circumstances where the will drafted substantially benefits from the will
What should a solicitor do if a client is proposing to make a gift of significant value to them?
The solicitor should advise the client to seek independent legal advice
**but does not necessarily have to refuse to act, simply must proceed with caution
If a will is made as a consequence of duress, what happens?
It will not be regarded as the act of the testator and will not be admitted to probate
When will a will made under duress be admitted to probate?
If the court pronounces that it is valid and issues a grant in solemn form
What is undue influence?
Coercion/pressure that overpowers the freedom of action of the testator
What are the formalities that must be followed for executing a will?
- In writing
- Signed by the testator/somebody directed to in their presence
- Signed by the testator in the presence of two or more witnesses at the same time
- Signed by each witness in the presence of the testator (does not need to be in the presence of each other)
What criteria must be fulfilled to be a witness? Can certain people not be witnesses?
A witness must be capable of understanding the significance of being a witness (cannot be mentally unsound).
Blind person cannot be a witness.
Illiterate person can be a witness if they are aware that the testator is signing the document.
Minor can be a witness if they are able to understand the nature and importance of the act.
What is an attestation clause?
A clause in the will confirming that the conditions for a valid execution of a will have been satisfied
If an attestation clause is not included, what must be done?
The person offering the will to probate must provide evidence that these formalities were followed
In the case of a blind/illiterate witness, what attestation clause is required?
A special attention clause stating that
- The will was read to the testator
- They understood and approved it
- They signed it
Does a signature of a will need to be in a certain format? Does it need to appear in a specific place on the will?
A mark can be used
It can appear anywhere in the document
If a will would like to incorporate other documents, what conditions must be satisfied?
Document must be:
- in existence at the date of the will
- referred to in the will as already existing
- clearly identified / identifiable from the will
** can incorporate a document that is not yet existing, as long as you refer to it as already existing
What is a codicil?
Document that amends / adds to / partially revokes and existing will
When making a codicil, what must be included at the end?
A clause confirming the unamended part of the will
What does a codicil do to the date of a will?
A codicil republishes the will (will is treated as made at the date of the codicil)
How is a codicil helpful in relation to in-executed alterations in a previous will?
A codicil can republish the will and make these alterations valid
How must valid amendments to a will be made?
Amendments must be formally executed in the margin of the page, and signed in the presence of two witnesses
What is an exception to the usual rule of valid amendments to a will?
If the testator crosses out the original words so that they are not legible, the revocation is invalid
If a testator crosses out a figure so that it is not legible, and writes a different figure, what is the effect?
Crossing out the figure = the gift will be of nothing
Writing a new figure = only valid if executed with formalities / codicil
What is a pre-condition of revocation?
A testator must have capacity?
What are the methods of revocation?
By subsequent will
By destruction
By marriage / CP
Divorce / annulment
What is revocation by destruction?
Done by testator burning / tearing / destroying the will OR somebody else doing it in their presence at their direction.
Testator must have the intention to destroy the will
What is the rebuttable presumption if a will that was previously in their possession cannot be found at the testator’s death?
Rebuttable presumption that testator destroyed with requisite intention
What is the doctrine of dependant relative revocation?
Where a testator’s intention to revoke a will was conditional upon a future event, and the event did not take place, the original will may be valid even if destroyed
What is revocation by divorce?
The law will treat the former spouse as having died on divorce.
Any appointment of the former spouse as executor will be invalid.
Where there are mutual wills, what is the effect on one testator deciding they want to make their own will?
A mutual will creates a contract between testators - an equitable principle of constructive trust will be in favour of the beneficiaries.
I.e., if one spouse receives all assets and makes a new will with new beneficiaries, the court enforces the original agreement by declaring that the surviving testator (or their estate) holds the relevant assets on constructive trust for the beneficiaries named in the mutual wills.
For a person to be an executor, what must be ensured before taking on the position?
That they are willing and able to take up the position
Can certain people not be executors?
Cannot be a child or a person lacking mental capacity
If a person does not want to be an executor, what can they do?
They can renounce their right to a grant of private if they have not intermeddled / accepted office
A person who does not wish to act, but might change their mind later, can have power reserved
What are the for formalities for a renunciation of executorship?
Renunciation must be:
- in writing
- signed by executor
- contain a statement that they have not intermeddled
- signed by a disinterested witness
- filed at the probate registry
What are some examples of intermeddling?
Selling deceased’s assets
Paying off debts of the deceased
Carrying on a business of the deceased
What is not intermeddling?
Arranging a funeral
Insuring deceased’s assets
Gathering deceased’s papers
From when does a gift in a will take effect?
A gift in a will takes effect as if the will had been executed immediately before death (speaks from the date of death)
I.e., if testator gifts ‘all my jewellery’, it will be all their jewellery owned at the date of their death (does not incorporate anything received after, and does not include anything sold before death)
When are beneficiaries of a will determined?
Beneficiaries are determines at the date of execution
I.e., who meets that criteria at the time of signing the will (can change if codicil is made) - e.g., ‘a gift of X to my brother’s girlfriend’ = brother’s girlfriend at the time will was signed
What are the 5 different types of legacies?
- Specific legacy
- General legacy
- Demonstrative legacy
- Pecuniary legacy
- Residuary legacy
What is a specific legacy?
A gift forming part of the testator’s estate at death, distinguished in the will from other property.
The use of ‘my’ turns it into a specific gift - e.g., ‘my BMW, my Rolex’
What happens if a testator makes a specific gift, but no longer owns that asset when they die?
The gift will fail
If there is income arising from a specific gift after the testator dies, who is entitled to this?
The beneficiary of the specific gift is entitled to income arising since testator’s death
What is a general legacy?
A gift of property not distinguished in the will from other property of the same kind
If a general legacy does not form part of the estate at death, what can a beneficiary do?
The beneficiary can ask the executors to purchase the asset / produce the cash
What is a demonstrative legacy?
A general legacy payable out of a specific designated fund - e.g., £500 from my Lloyds Bank Account
What happens if a demonstrative legacy is not in existence at the date of death?
It will be treated as a general legacy
What happens if the source that a demonstrative legacy is payable from partially fails / has insufficient funds?
The reminding balance comes from the residuary
What is a pecuniary legacy?
A gift of money that can be specific / general / demonstrative
What is a residuary legacy?
Residue of the estate after all debts / liabilities / legacies
When will a specific gift fail? (3 instances)
- it is no longer part of the testator’s estate
- it no longer meets the description in a will
- it is subject to a binding contract for sale
What happens if a testator makes a specific gift but acquires a different asset that meets the same description?
The gift will speak from the date of death and beneficiary will receive the gift
e.g., testator makes a gift of ‘my BMW’, at the time they own BMW 1 but later sells this and acquires BMW 2 - gift will take effect
When will a gift lapse?
When the beneficiary has predeceased the testator
What happens to a lapsed gift?
If no substitutional beneficiary, gift will fall into the residue
What is the effect of s.33 of the Wills Act?
When a gift is made to the testator’s child / any other issue, who does before the testator, but leaves living issue, the living issue will receive the gift
How does s.33 Wills Act apply to unborn children?
Includes children who are conceived, but not yet born
If a testator makes a gift to their child, what is included in this?
Illegitimate and adopted children, but not stepchildren
When does a class close (generally)?
Class closes on the testator’s death - if nobody meets that description, gift will fail
If a gift is conditional upon members of a class reaching a certain age, when does a class close?
When the first member of that class reaches that age
(if this happened while testator was alive, class closes on testator’s death)
This includes beneficiaries living (even if they have not reached that age yet)
If a gift is made to ‘to the children of X’, when does the class close?
Class closes at testator’s death if X has any living children
If X has no children at that time, the class will close at X’s death
What is the spousal entitlement in intestacy?
If person dies and no issue, spouse gets the entire estate
If a person dies and leaves issue, the spouse takes:
- all personal chattels (tangible, moveable property, not money)
- £322,000
- one half of the residue absolutely
Issue takes other half of the residue
For a spouse to be entitled under intestacy, how long must they be living after death?
Spouse must survive the deceased by 28 days
What is the order of entitlement for intestacy if a person dies with no spouse?
- Issue (on statutory trusts, so including their children)
- Parents (but not father if parents were unmarried/father not on birth certificate)
- Brothers and sisters of the whole blood (on statutory trusts)
- Brothers and sisters of the half blood (on statutory trusts)
- Grandparents
- Aunts and uncles of the whole blood (on statutory trusts)
- Aunts and uncles of the half blood (on statutory trusts)
- The crown
What property passes outside of the will / intestacy?
- property owned as joint tenants
- life assurance policies
- pension scheme benefits
- nominated property
- life interests in trust property
- gifts where donor has reserved a benefit
What are the IHT implications of property passing as joint tenants outside of the will?
Property will form part of estate for IHT purposes (not if spouses)
How can a life assurance policy pass outside of the will / intestacy?
Can be held on trust / assigned to beneficiaries
What are the IHT implications of life assurance policies passing outside of the will?
Proceeds do not form part of the estate for IHT purposes
How can pension scheme death benefits fall outside of the estate?
Testator can make a non-binding nomination of a beneficiary
What are the IHT implications of pension scheme benefits passing outside of the will?
Will not form part of estate for IHT purposes
For nominated property to be transferred outside of the will / intestacy, what amount must they be up to?
Not exceeding £5,000”
Which assets is a grant of representation not needed for? What is needed to obtain these assets?
- Amounts up to £5,000 held in National Savings Bank Accounts / National Savings Certificates / premium saving bonds / building societies
- Chattels (furniture / jewellery / clothing / cars)
- Assets (land / buildings / bank accounts / pension benefits)
Can be obtained by producing the death certificate, but at the discretion of the institution
What is a grant?
A legal document that confirms a person’s ability to administer the estate
When is a grant of probate obtained?
When a deceased leaves a valid will
How many executors must obtain a grant of probate?
One executor can obtain a grant and can act alone.
At least two if there are minors / will deals with trusts
What is a grant of probate needed for?
To legally sell property owned in the estate’s name
To access deceased’s bank accounts
To transfer / sell shares
When is a letter of administration with will annexed made?
When there is a problem with appointing executors (all died/no one wants to act)
When the estate is partially intestate
What is the order of entitlement for a grant of letters of administration with will annexed?
- Executor
- Trustee of residuary estate
- Any other residuary beneficiary
- PRs of any residuary beneficiaries
- Any other beneficiaries / creditors
- PRs of any other beneficiaries / creditors
What is clearing off?
The process by which a person applying for a grant clears off those with a better right to the grant
people in the same category do not need to be cleared off
When is a grant of letters of administration obtained?
When the deceased dies intestate / all gifts in the will have failed
What is the order of entitlement for a grant of letters of administration?
Follows intestacy
When is a grant de bonis non obtained?
This is a second grant to allow the completion of administration of an estate.
If a person dies intestate, grant de bonis non is needed
It is not needed when there is a chain of representation (executor dies, and executor’s executor must take grant).
What happens if a minor is named as an executor?
Minor cannot take a grant - a limited grant to their parents can be made
How can IHT liability be funded?
- Bank can release funds directly to HMRC
- Bank loan may be taken out
- Loans from beneficiaries
- Sale of assets
- Insurance policy payments
- HMRC may allow grant to be obtained on credit / paid in instalments
When is IHT due?
Due 6 months from the end of the month in which the deceased died?
When does interest on IHT begin to accrue?
After 6 months from the end of the month in which the deceased died
What form is used for a probate application if the person who died left a will?
Form PA1P
What form is used for a probate application if the person who died did not leave a will?
Form PA1A
What is a caveat?
Prevents the issue of a grant
How long is a caveat valid for?
Up to 6 months
What is a citation?
Used when an executor has lost right to renounce by intermeddling, and has not applied for a grant, and does not intend to
What is a citation to accept / refuse grant?
Used to clear off a person with a better right to a grant
Within what timeframe must PRs deliver an account to HMRC?
Within 12 months from end of month of death
If a deceased co-owns land, how much discount will be applied to he valuations?
For residential property = 15% discount
For investment property = 10% discount
no discount when co-owned with spouse
When valuing an estate, what is included?
All assets
+
All gifts made
+
Value of any trusts (where deceased was beneficially entitled)
What is an excepted estate?
An estate that owes no IHT
When is the estate of a non-UK domiciled person excepted?
When their estate consists solely of:
Cash / quoted shares valued up to £150,000
What is a PR’s duty to collect deceased’s assets?
Within a reasonable time, PRs must collect monies due / other assets
What is a PR’s duty to administer the estate?
PRs must:
- realise any investments
- pay off debts and legacies
- distribute the residue
What is a PR’s duty of care?
PRs must act with reasonable care and skill, taking into account any specialist knowledge / experience / what is reasonably expected of professional PRs
Can a court relieve a PR from liability after a breach of their duty of care?
Court has discretion to relieve PR from liability if they are satisfied that the PR acted honestly, reasonably, and ought fairly to be excused
What are the PR’s powers
- To sell / mortgage / lease
- To appropriate (satisfy a legacy in the estate)
- To accept receipts for minor’s property / appoint trustees for minors
- To insure
- To delegate
- To indemnify for expenses (can reimburse themselves for expenses incurred)
- To maintain a minor
- To advance capital
- To give receipt
- To run the deceased business (but only if they are selling it as a going concern - sell it as an operating, functioning business)
- To invest
What is the investment criteria for PRs?
Suitability of the investment
The need for diversification
What does a PRs power to maintain a minor involve?
Where property is held for a minor, and minor has the right to immediate income, PRs can apply the income for the maintenance / education / benefit of the minor
What does a PR’s power to advance capital entail?
PRs can advance capital to a minor to advance their position in life
If there is a life beneficiary, they must give their consent
How many PRs must there be to give a valid receipt for the proceeds of sale of land
A sole PR can give a valid receipt
but
all PRs but join together for the transfer of land and shares
How does a PR protect themselves from claims from unknown beneficiaries?
By complying with s.27 of the Trustee Act:
- Placing adverts in the London Gazette + local newspapers
- Requesting any interested person to contact them within a minimum of two months
What happens if PRs do not comply with s.27 of the Trustee Act?
They will be personally liable
What can a PR do in relation to claims of missing beneficiaries / creditors? (4 options)
- Make the payment into court and distribute the rest
- Distribute everything with an indemnity from the beneficiaries
- Seek a Benjamin Order (based on an assumption)
- Purchase insurance against the risk of the beneficiary / creditor appearing
How long should PRs wait before they should distribute the estate?
6 months form the date of issue of the grant of probate (this is the deadline for claims against the estate to be made)
What should PRs do if the deceased acted as a guarantor?
- estimate and set aside an appropriate amount
- seek indemnity from the beneficiaries
- arrange insurance before distributing
- apply to the court for directions
What happens if IHT remains unpaid after 12 months?
PRs will have liability, but HMRC will not pursue them if
- they made full enquiries
- they obtained a certificate of discharge
What is a solvent estate?
An estate where all reasonable funeral / testamentary / administration expenses / debts / other liabilities can be paid in full
What order of assets should an unsecured debt be paid from?
- Undisposed property in the will
- The residue
- Property specifically gifted for the payment of debts
- Property specifically charged for the payment of debts
- Pecuniary legacy fund
- Property specifically gifted
What is the doctrine of marshalling?
A disappointed beneficiary can be compensated from their residue for their loss of their gift being offset against unsecured debts
What is the order of payments of debts in an insolvent estate?
- Secured creditors
- Reasonable funeral / administration expenses
- Preferred debts (wages for 4 months prior, max £800 each)
- Ordinary debts (money owed to HMRC, balance of preferred debts)
- Interest on preferred and ordinary debts
- Deferred debts (loans from spouse)
When are PRs protected if they make a payment to a lower class before payments to higher classes and the estate ends up insolvent?
PRs are protected if they acted in good faith
How can a person disclaim a gift? What conditions must apply.
- Can disclaim orally / in writing
- Original beneficiary cannot have accepted any benefit
- Must be in writing to be effective for tax purposes
What happens to a disclaimed gift?
It falls into the residue
How can a person vary a gift? What formalities need to be followed?
Must be
- in writing
- made within 2 years of death
- not made for monetary consideration
- contain a statement required for IHT/CGT
- PRs must sign a statement if IHT liability increases
Can be varied even if a person has accepted a benefit
Can be a partial variation
How are chattels transferred?
Delivery in return for a receipt + cancel insurance
How are company shares transferred?
Stock transfer form
+
Office copy of grant
+
Share certificate
How is land transferred?
Assent in writing
+
Beneficiary registers interest at HMLR
Who pays the costs of transfers at death?
The beneficiary
When does a debt abate?
When the deceased does not have sufficient assets to fully satisfy their creditors, their debts abate (creditors must accept a lower value)
What can PRs do with minor’s property?
- hold the property until the child turns 18
- use the power of appropriation
- appoint trustees to receive / hold the property until the child turns 18
- pay the legacy into court
Who is IHT payable by?
The beneficiary of the gift
What gifts in a will are free of tax?
A specific gift of UK property
What is obtained after payment of IHT?
A certificate of discharge - unless there is fraud / failure to disclose / discover of further assets / change in tax liability
Does an excepted estate get a certificate of discharge?
No, they are automatically discharged 35 days after obtaining a grant of representation
What do estate accounts show?
- residual balance
- how much IHT has been paid
- expenses incurred in the administration period
- how assets have been distributed
- income received over the administration pension
What are the three estate accounts?
Income account
Capital account
Distribution account
What is a commentary?
Document that accompanies estate accounts and gives values of assets.
Also explains the order of the estate’s disposal.
What does the income account show?
- income receipts
- expenditure from income (tax, interest paid)
- net amount to be distributed
- post-death income received
What does the capital account show?
- assets at probate value
- sales of assets by PRs
- liabilities that have been discharged
- legacies paid
- expenses incurred
- tax paid
- balance available for distribution
- income relating to paid before death but received post-death
What does the distribution account show?
How beneficiary entitlement will be met
Once accounts are finalised, what must PRs do to proceed?
Endorse them to approve them.
Must also be sent to residuary beneficiaries for them to endorse.
How are PRs discharged?
Beneficiaries formally discharge them with an agreement to indemnify them against all claims
What happens if a beneficiary refuses to discharge a PR?
PR can ask the court to discharge them / pay the beneficiary’s share of entitlement into court
If PRs are dealing with land, what two options do they have to give the beneficiary their entitlement?
- PRs can apply to be registered as owners (producing the grant of probate and death certificate) and transfer the property to the beneficiary.
- PRs can transfer the property by assent.
What formalities must be followed for an assent?
In writing
Signed by PRs
Be signed by beneficiary
Apart from transfer of property to a beneficiary, when else is an assent needed?
If the PRs continue to hold the property in a different capacity as trustees (e.g., beneficiary has to satisfy a contingency), an assent will be required to formally vest the property in them as trustees.
What rights does a beneficiary have?
A chose in action - the right to have the deceased’s estate property administered.
Until the estate is properly administered, the beneficiaries have no legal or equitable interest in the deceased’s assets.
What income rights does a specific gift recipient have?
The right to income accruing from death
What income rights does a residuary beneficiary have?
The right to income received in the period between death and administering (e.g., rental income received, bank interest received, investment income received).
What action can a beneficiary take against a PR? Can a PR be excused?
Personal action - but PR can be absolved if they acted honestly, reasonably and ought fairly to be excused
Can a beneficiary get back property of the estate that PRs have wrongly distributed? Any exceptions?
Beneficiaries have the right to trace and recover property.
However this right is lost against a bona fide purchaser / when it is inequitable
Can beneficiaries take action against a person wrongly receiving estate assets?
Yes, beneficiaries can take personal action
Under the Inheritance Act, how long does an applicant have to make a claim against an estate?
6 months from the issue of grant of representation or later with court permission
If PRs wait 6 months, they will be protected from personal liability
What categories of people can make a claim against an estate?
- surviving spouse at the date of death
- former spouse that has not remarried
- child of the deceased / somebody treated as a child (not if adults who are able bodied and in employment)
- person being maintained wholly or partly by the deceased
- person living with the deceased for at least 2 years before death as their spouse
If a person wants to make a claim against an estate, what will the claim be for?
The fact that reasonable financial provision has not been made in the will / intestacy
What is the test of reasonable financial provision?
- Has the will / intestacy failed to make reasonable financial provision?
- If so, what would be such provision?
What is the spousal standard of reasonable financial provision?
Such financial provision as would be reasonable in all the circumstances
(regardless of if whether it is required for maintenance)
When is the spousal standard of reasonable financial provision applied to former spouses?
If the deceased dies within 12 months of the final order being granted
What is the general standard for reasonable financial provision?
Such provision required for their maintenance such that they can live decently and comfortably
objective test
What guidelines are used to decide if reasonable financial provision has been made generally?
- financial resources / needs of the applicant
- any moral obligations of the deceased to any applicant
- size and nature of the estate
- any physical / mental disability of the applicant
- any other relevant matters (e.g., conduct)
What guidelines are used to decide if reasonable financial provision has been made for a spouse?
The general guidelines:
- financial resources / needs of the applicant
- any moral obligations of the deceased to any applicant
- size and nature of the estate
- any physical / mental disability of the applicant
- any other relevant matters (e.g., conduct)
PLUS
- age and duration of marriage
- contributions to the welfare of the deceased’s family
- provisions that would have been expected on divorce
What guidelines are used to decide if reasonable financial provision has been made for a cohabitant?
The general guidelines:
- financial resources / needs of the applicant
- any moral obligations of the deceased to any applicant
- size and nature of the estate
- any physical / mental disability of the applicant
- any other relevant matters (e.g., conduct)
PLUS
- age of the applicant
- duration of cohabitation
- contributions to welfare of the deceased’s family
What guidelines are used to decide if reasonable financial provision has been made for a child?
The general guidelines:
- financial resources / needs of the applicant
- any moral obligations of the deceased to any applicant
- size and nature of the estate
- any physical / mental disability of the applicant
- any other relevant matters (e.g., conduct)
PLUS
- manner in which they were educated
- whether deceased knew they had a child / for how long
- whether deceased knew the child was not theirs
What orders can be made if a claim against the estate is successful?
Transfer of property
Payment of a lump sum
Payment of income
Settlement of property on trust
When can a court make an order in relation to disposed property in the context of a claim against an estate?
Court can make an order relating to property disposed of by the deceased before death if that disposal was intended to avoid the provisions of the Inheritance Act
What is the nil rate band?
The tax-free amount of an estate
£325,000
What happens if an estate exceeds the NRB?
Any amount exceeding the NRB will be taxed at 40%
Can a lower rate of IHT be payable?
If at least 10% of the net baseline amount of an estate is left to charity, the estate will qualify for a reduced rate of Inheritance Tax (IHT) at 36% instead of the standard 40%.
taxable estate after deducting the nil-rate band (£325,000) and any other reliefs (e.g., business or agricultural relief or residence NRB).
What is the IHT provision in relation to lifetime transfers to trusts / companies?
These transfers are always chargeable to IHT
There may be more tax payable if the transferor dies within 7 years of making the gift
What is the IHT provision in relation to lifetime transfers to individuals?
These transfers are not immediately chargeable, but will become chargeable if they exceed the NRB and donor dies within 7 years of making the gift
What is IHT specifically charged on?
The value of any asset transferred
What IHT liability does a UK domiciled person have?
Liable to IHT transfers on all worldwide assets
What IHT liability does a non-UK domiciled person have?
Liable to IHT on transfers of only UK assets
external property is excluded and ignored for IHT purposes
Which specific transfers are ignored for IHT purposes?
Transactions at an arms length (not intended to confer any gratuitous benefit on any person)
How are transfers valued for IHT purposes?
The transfer will be based in the loss of value to the donor rather than the gain by the recipient
E.g.,
A has a 55% shareholding and gifts B 15% worth £15,000.
Despite the gifted shares being worth £15,000, A’s 40% is now worth £30,000, and so the transfer value will be £20,000 (the value A has lost by gifting his shares)
What are potentially exempt transfers (PETs)?
Lifetime transfers that are neither exempt nor automatically chargeable - depends on whether the donor dies within 7 years of making the transfer
What are the exempt transfers for IHT purposes (6)?
- Gifts to spouse
- Gifts to UK charities
- Small gifts
- Gifts on marriage
- Normal expenditure out of income
- Annual exemption
What is the spousal exemption for IHT?
Any transfer to a spouse during lifetime or on death is completely exempt from IHT
Does the spousal exemption apply to non-UK domiciled spouses?
Not completely.
If the donor spouse is UK domiciled and the recipient spouse is not, only £325,000 of the transfer is exempt (forms part of the NRB)
What is the small gift exemption for IHT?
Lifetime gifts up to £250 to any donee in a tax year are exempt from IHT
There is no limit to the number of donees
Can a person gift £500 and use the small gifts exemption partially?
No, the small gifts exemption is an all or nothing exemption - if over £250, the entire amount will be subject to IHT
What are the amounts for gifts on marriage exemption?
Parents - up to £5,000
Grandparents - up to £2,500
Bride to groom / vice versa - up to £2,500
All others - up to £1,000
this is not an all or nothing exemption
In order to be eligible for the normal expenditure out of income exemption, what must be shown by the donor once making the gift?
That the donor is left with sufficient income to maintain their normal standard of living
How much limit is there to be eligible for the normal expenditure out of income exemption?
There is no monetary limit
What is the annual exempt amount for lifetime transfers?
£3,000 annually
What order does the annual exemption for lifetime gifts follow?
The exemption is set against gifts in chronological order (earlier first)
Can an annual exemption for lifetime transfers be carried forward?
Can be carried forward for one tax year (so can have maximum £6,000 annual exemption for lifetime transfers in one year).
If a person carries forward their annual exempt amount for lifetime transfers, what order is is used in?
Any current year exemption must be used before any previous tax year
Do PRs get an annual exempt amount?
PRs are entitled to an annual exempt amount of £6,000 for the tax year if death and the following two tax years
They cannot carry forward the exemption, but can carry forward the loss
This is not in addition to the personal annual exempt amount
To qualify for business relief, what conditions must be met? Any exceptions?
The asset / business was used for trading purposes, not investments.
The asset / business was owned for at least 2 years before death or transfer.
exception = if the business asset was replaced with another business asset in the last 3 years, or if the business asset was gifted from a spouse
Which assets does business relief not apply to?
- businesses/assets used in investment activities
- businesses in liquidation or about to be wound up
- non-trading companies
How much relief can be claimed under business relief?
100% relief -
- a sole trader’s business / partnership interest
- shares in an unlisted trading company (unquoted shares) - no minimum shareholding
50% relief -
- assets owned by the individual but used in a business in which the donor was a partner / company they control
- shares in a listed company (quoted shares) where donor had voting control (50% of ordinary shares)
Which assets qualify for agricultural relief?
- farmland / land used for growing crops
- buildings used for farming
- woodlands (where trees are part of a farming business)
What assets do not qualify for agricultural relief?
- land used for grazing horses (but applies if horses are bred for reproduction)
- land used for fishing
- land used for shooting
- land used for sports
Non-operational farmland does not qualify
How long must a person must have owned the land to be entitled to agricultural relief?
Land must have been owned and used for agricultural purposes for at least:
- 2 years if occupied by the owner
- 7 years if the land is let to someone else (landlord must have held the land for at least 7 years)
What exemption rates are applicable to agricultural relief?
100%
- agricultural property owned and occupied by the owner
- tenancies granted after 1st September 1995
50%
- tenancies granted before 1st September 1995
What is the residence nil rate band?
Additional allowance on estates when a main residence is passed to direct descendants (children / grandchildren)
How much is RNRB?
£175,000 in addition to NRB of £325,000
Can RNRB be transferred?
Can be transferred to a surviving spouse (£175,000 x2)
Can NBR be transferred?
Between surviving spouses (£325,000 x2)
How much can estates be tax-free using exemptions?
Solely = £500,000 (NRB + RNRB)
Couples = £1 million (NRB + RNRB x2)
When does RNRB taper?
If estates are worth more than £2 million, RNRB is reduced by £1 for every £2 over the £2 million threshold
What is quick succession relief?
Relief that applies if the same assets are taxed twice within a short period due to multiple deaths.
QSR reduces the IHT payable on the second estate
When does quick succession relief apply?
When:
- a beneficiary inherits an asset and pays IHT on it
- the beneficiary dies within 5 years, and the same asset becomes part of their estate
What are the relief rates for quick succession relief?
Person dies:
- within 1 year = 100% deduction of IHT
- within 1-2 years = 80% deduction of IHT
- within 2-3 years = 60% deduction of IHT
- within 3-4 years = 40% deduction of IHT
- within 4-5 years = 20% deduction of IHT
What is the tax implication of a gift with reservation of benefit if the donor continues to use or benefit from it?
Its value will remain part of the estate for IHT purposes when they die.
If they give up the benefit (e.g., stop using it), it becomes a PET from this date (tax implications if donor dies within 7 years)
What is the taper relief amounts for a PET?
0-3 years = 0%
3-4 years = 20%
4-5 years = 40%
5-6 years = 60%
6-7 years = 80%
7+ = 100%
*count forward 7 years from PET.
calculate the full tax owed, then reduce that amount by the relevant %
When is additional tax payable on chargeable lifetime transfers? How is this worked out?
Additional tax on chargeable lifetime transfers (one where tax is paid when made at 25/20%, and then donor dies within 7 years) is worked out by first taking the CLT amount, then calculating the remaining NBR (and trying to fit any into the exempt amount), and then charging the additional tax at 40% on the remaining.
Trustees will, however, receive credit for any lifetime tax that was paid on the CLT (whoever paid it), and the difference between death tax and lifetime tax paid is the additional tax payable. This tax credit does not apply to PETs (because no tax was paid when they were made). If lifetime taxes were overpaid, no repayments will be given (the tax payable for IHT purposes will simply be brought down to 0).
How is an asset valued for IHT?
Value of an asset is the open market value at death
With freehold property, what is the relevant liability and burden for the asset?
Liability = PRs (they must pay
Burden = residuary (where tax will be paid from)
If there is tax payable as a result of a gift with reservation of benefit, where is the tax paid from?
The donee / recipient of the gift pays the tax
If a court would like to make a provision order under the Inheritance Act, what criteria must be met?
- Application must be made within the requisite time limit (6 months from the grant of representation)
- The Applicant must fall under one of the relevant categories of the Act
- The court must be satisfied that there is a lack of reasonable financial provision
What will the court consider when determining whether there has been no reasonable financial provision?
- size and nature of the net estate
- moral obligations of the deceased
- mental / physical disability of the applicant
- applicant’s financial resources
- age of the applicant
- if a child of the deceased, how they were brought up
Will a court allow a financial provision claim for estranged children?
Courts sometimes make provision for adult children that have been estranged.
No guarantee how a court will decide.
However, if child is adult and does not require support to maintain themselves, it is unlikely that a substantial sum will be granted to them.
What steps are required to obtain a grant of probate?
- Death must be registered and death certificate must be obtained
- Need to submit a HMRC account giving details of the deceased’s assets and values of those assets (within 12 months of end of death month)
- PA1A (if no will) or PA1P (if there is a will) need to be submitted. Executors must sign a statement of truth
- Documents submitted to court of probate
When does Form IHT 205 need to be completed?
Where there is an excepted estate and no tax is payable, and death occurred before 1st January 2022
Which documents must be submitted to the court of probate to obtain a grant of probate?
- death certificate
- statement of truth
- original and 2x copies of wills/codicils
- additional evidence
- supporting documentation
- payment for probate fees
When does a gift adeem?
When a specific asset is no longer part of the testator’s estate at death.
When specific asset is subject to a binding contract for sale.
When specific asset no longer meets the description in the will.
If a gift adeems, what can be done?
The residuary beneficiaries may choose to make a variation to benefit the beneficiary who missed out on their gift (but there are tax consequences)
