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In the eleventh of a series of extracts adapted from his eBook 'Hutton on Estate Planning' (3rd Edition), Matthew Hutton looks at Inheritance Tax (IHT) Will planning, and post-death rearrangements to remedy Wills which may have been overtaken by events.

Wills

On death a person can secure that his possessions go to intended recipients by means of a validly made and executed Will. Remember the trap that neither of the two required witnesses must be a beneficiary, as otherwise they will forfeit their right to inheritance.

Failing a Will for all or part of an estate (as a Will could extend to just part), the property will pass according to the intestacy rules, which can throw up some surprising results.  It is a common misapprehension that ‘there’s no need to make a Will as I want everything to go to my wife and she’ll get it anyway’. Well, she will so long as there are no children or remoter issue, brothers or sisters, nephews or nieces, parents or grandparents, etc., surviving. The intestacy rules can mean not only property going to people who the deceased would rather not have had it, but also triggering an IHT bill on death which might not have been necessary with proper planning. Of course, tax efficiency is not the only aspect of Will planning and other issues such as the appointment of executors as the chosen persons to administer the estate might be just as important. The important thing is to keep the Will (and any letters of wishes) up to date.

The main IHT planning issue applies only to married couples and members of a registered civil partnership – and then on the first death. For deaths before 9 October 2007, it was axiomatic that full use should be made of the Nil-Rate Band, insofar as not taken up by chargeable lifetime gifts in the seven years before death, in passing assets other than to the survivor on the first death. Otherwise the property would be passed to the survivor, whether absolutely or on an ‘immediate post-death interest’ trust, so deferring any IHT liability on that estate until the second death. That ‘accepted wisdom’ has been overturned by the introduction of the Transferable Nil-Rate Band (found in IHTA 1984 s 8A).  General policy should now be to maximise use of the Spouse/Civil Partner Exemption on the first death. In any event, between the two deaths there might be some IHT mitigation which can be undertaken through Potentially Exempt Transfers (PETs) made by the survivor to limit the impact on the second death.  

Post-Death Rearrangements

Suppose that, in IHT terms at least, the deceased did not ‘get it right first time’ – or even at all. What then? Whether or not a reasonably drawn Will was left, there are three statutory possibilities open to the beneficiaries so as effectively to rewrite the provisions of the Will or indeed intestacy for IHT purposes. 

(a) Written Variations or Disclaimers

The beneficiary, being of full age and capacity, can within two years after death redirect the entitlement, whether as a share in residue or a specific gift, to another beneficiary or indeed to trustees (IHTA 1984 s 142). Providing the technicalities are observed, and certain anti-avoidance rules sidestepped, this takes effect as if it had been effected by the deceased’s Will. A similar point applies where a beneficiary ‘disclaims’ the original gift, though a disclaimer cannot be made in favour of a specific person; rather the destination of the gift depends on the terms of the Will or intestacy and the property will go to the person next in line. The making of a variation or disclaimer will generally not constitute a disposal for Capital Gains Tax (CGT) purposes. Otherwise, however, the reliefs take effect for IHT only and the disposition which is occasioned by the variation or disclaimer will carry the normal Capital Gains Tax and Income Tax consequences. 

(b) Precatory Trusts

A husband might leave his personal possessions to his wife but express the wish that within two years after death she makes certain redirections of specified chattels to particular individuals. If she does this in accordance with the wishes (which may be written or oral) the ultimate beneficiary is treated as the person entitled in the estate (IHTA 1984 s 143). This can be quite a convenient, and indeed is a common, way of dealing with chattels under a Will to cater for example with acquisitions of further chattels or changes of mind without the need to make a new Will each time. However, what is on the face of it a relieving provision can carry a trap in the context of the Transferable Nil-Rate Band.

(c) Appointments out of Relevant Property Trusts within Two Years of Death

A person might leave either his whole estate or a Nil-Rate Band gift on discretionary trusts. If within two years after the death but before any right to income has arisen the trustees appoint any or all of those assets either to individuals outright or to other trustees, the normal exit charge on property leaving a relevant property trust is disapplied (IHTA 1984 s 144). Typically, trustees would so act in accordance with a fairly detailed (and regularly reviewed) letter of wishes from the deceased as to how they should exercise their discretion. But this can in appropriate circumstances be quite a good way of dealing with the disposition of assets owned by the deceased when circumstances are likely to change between making the Will and the date of death, and indeed, in the case where there is a surviving spouse/civil partner, of maximising that relief as well as generally providing best for the family. New express rules were introduced by FA 2006. 

The above is an adapted extract from Hutton on Estate Planning 3rd Edition.

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