Malcolm Finney considers how dying without making a will may increase the tax charge on death.
Unfortunately, despite widespread advertising many people do not have a will. Many intend to make a will, but for one reason or another never quite get round to making one.
One common reason often expressed for not making a will is that ‘if I die my wife will automatically inherit everything anyway’. This, however, is incorrect.
Furthermore, the tax consequences of not making a will may be more penal than if a will is made.
Inheritance tax and intestacy
Take Mr and Mrs Cleverdick (or two civil partners) who have two children, and Mr and Mrs Notsocleverdick (or two civil partners) who also have two children.
Mr and Mrs Cleverdick have each made a will. Under each will on death of the first spouse to die the surviving spouse inherits everything; on death of the surviving spouse the children inherit everything.
No inheritance tax (IHT) is levied on the death of the first spouse to die, but IHT at 40% will be levied on death of the surviving spouse on the estate over £650,000. There is therefore a significant cash flow advantage due to the deferral of any IHT charge, which means the surviving spouse has more of the estate available to him/her during his/her lifetime.
Neither Mr nor Mrs Notsocleverdick has made a will. On the death of the first spouse to die, the surviving spouse does not inherit everything. As provided by law £250,000 of the estate passes to the surviving spouse together with all the deceased’s personal chattels (e.g. books; jewellery; wines, etc.) plus 50% of the balance of the estate; the other 50% of the balance passes to the children (albeit held on trust). IHT may in such cases be chargeable on the death of the first spouse to die (depending upon the size of the estate) which, together with the 50% left to the children, may significantly reduce the amount available to the surviving spouse during his/her lifetime.
Thus, not only is the potential IHT effect worse in the absence of a will, but the children may inherit on the death of the first spouse to die whether or not this is what the spouses would have wanted.
Business/agricultural property relief trap
Where property is comprised in the estate which qualifies for business/agricultural property relief (BPR/APR) for IHT purposes (e.g. unquoted shares; sole trader business) the relief will be wasted if the surviving spouse inherits such property (i.e. if the spouse inherits the property no IHT charge arises in any event due to the inter-spouse exemption and thus any available BPR/APR will be wasted).
Dying without making a will may result in such loss whereas under a will such property can be directed to a non-spouse (e.g. children; brother; sister, etc.) beneficiary, thus ensuring advantage of BPR/APR is taken in which case the overall IHT charge on death will be mitigated.
Capital gains tax and intestacy
No capital gains tax charge (CGT) arises on assets held at the date of death. Thus, the CGT effects are the same whether dying intestate or having made a will.
Post-mortem will alterations
Such alterations designed to mitigate any IHT charge following an intestacy should not be relied on, as necessary consents from beneficiaries may not be forthcoming (a future article will examine such alterations in depth).
Practical Tip:
Making a suitably worded will cannot make any IHT charge on death worse than dying without having made a will and the potential benefits (tax and non-tax) of having a will materially outweigh the professional costs of making it.
