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Malcolm Finney looks at some tax and non-tax consequences when an individual dies without having made a valid will, for Tax Insider.

Introduction

Dying without a will is commonly referred to as ‘dying intestate’. However, even if a will has been made, if it is held to be invalid, the individual still dies intestate.

A will may be invalid for a number of reasons; for example, only one witness (instead of two, as required) attests and signs the will or the individual making the will was not of sound mind at that time. It may be that the will was valid when drawn up but has been revoked due to a subsequent marriage.

Non-Tax Consequences

Without doubt the main consequence of dying intestate is that the law, and not the deceased, determines not only who inherits but the amounts of the inheritance which in turn depends upon who (as in which family relations) survives the deceased.

For example, where the deceased is survived by a spouse and children, only they inherit.

In practice this may not be perceived as particularly problematic; however, the split between surviving spouse and children may be somewhat disproportionate, arguably, favouring the children the larger the estate.

Where the deceased dies with an estate worth £250,000 or less the wife takes all; where the estate is £500,000 the wife takes £250,000 and the children take £125,000 on attaining age 18 and a further £125,000 when the surviving spouse dies; where the estate is £1 million the wife takes £250,000 and the children take £375,000 on attaining age 18 and a further £375,000 when the surviving spouse dies (the right of the surviving spouse to a life interest in part of the estate and the deceased’s personal chattels are ignored here for ease of comparison).

The consequence of children acquiring significant sums at age 18 may not be perceived as overly satisfactory.

For second marriages the intestacy rules may not be appropriate. For example, for smaller estates (e.g., estates of circa £400,000) the wife takes the bulk of the deceased’s estate thus potentially depriving the children from the first marriage of any future significant inheritance (e.g., if the spouse spends the inheritance or remarries leaving his/her estate to the new wife/husband).

The fact that other members of the deceased’s family (e.g., parents; brothers; sisters) or charities may not inherit could possibly also be perceived as unacceptable.

Tax Consequences

As the law dictates who should inherit and in what amounts, the Inheritance Tax (IHT) consequences are predetermined and any form of pre-death IHT planning is thus precluded. Whether any material downside arises depends to some extent on the size of the deceased’s estate.

On the death of the first spouse to die IHT (due to the inheritance by the children) may arise on the deceased’s estate which could have otherwise been avoided by, for example, leaving only the Nil Rate Band (currently £325,000) on trust for the children with the balance of the deceased’s estate left to the surviving spouse (exempt from IHT). This may offer significant cash flow advantage.

It may be that some assets in the deceased’s estate qualify for favourable IHT treatment (e.g. 100% Business Property Relief), which is wasted if it is the surviving spouse who inherits.

Deeds of Variation

It is, however, important to note that deeds of variation (DoV) may be employed by those who inherit (other than children below age 18) to redirect their inheritance to others without IHT or CGT consequences; it is often assumed that DoVs can only be used where the deceased had executed a will but not on an intestacy; this is incorrect. The use of DoVs may thus help to mitigate any adverse IHT arising due to the application of the intestacy rules.

For Capital Gains Tax (CGT) purpose dying intestate is less of an issue due to the revaluation of assets held by the deceased to their market value.

Practical Tip

Leaving the law to dictate who inherits on an intestacy is a risky business and may not be either tax or non-tax efficient. There is no substitute for executing a will; the process is not irreversible. Until death the will is of no impact and once made can easily and readily be revoked or amended. There is no downside to executing a will.