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Tolley's Practical Tax by Nick Waterhouse-Brown

Nick Waterhouse-Brown continues his look at why it is important to make a Will and the potential problemsThis article continues from Part 1, which showed, in a number of examples, what happens to those people who die without wills (ie dies intestate). It can often result in assets being given to brothers and sisters of the deceased, leaving insufficient finances and legal problems for the surviving spouse. So if we don’t want to fall within the intestacy rules, we will have to make a will. Let us therefore consider the things that need to be included in a will to make it valid under UK law.

1. Requirements for a valid will

- Must be in writing
Every will other than a privileged will (a will made by a soldier, sailor or airman) must be made in writing. The will document needs to be sent with the death certificate, and a signed oath (and one or two other documents) to the court in order to obtain a grant of probate.

It is essential that the will is correct and valid under law because this document needs to be proved correct in the Probate Court in order for authority to be granted to the executors.

The grant of probate is necessary because it authorises the executors to carry out the wishes of the deceased in accordance with the terms of the will, therefore allowing them to sell, collect and distribute all the deceased’s assets to the beneficiaries.

- Must be signed by (or on behalf of) the testator, who is over 18, and witnessed accordingly
To be valid, a will must be signed by the testator (the person making the will) or by some other person directed to sign the will in his presence on his behalf. This signature must be witnessed by two independent witnesses who must sufficiently identify themselves and be of sound mind. One of the most common mistakes made is when family members (who are beneficiaries of the wills or spouses of the beneficiaries) witness signatures. This has the effect of making the gift the witness would have received become null and void.

- There must be the intention to make a will and the testator must be of sound mind
The testator must have a full knowledge of what he is doing when he makes a will. For this to apply, it is necessary for the testator to be of sound mind, memory and understanding. If the testator had been suffering from a mental disorder prior to making of the will, the beneficiaries may be able to contest the will after the death. The best way of avoiding this is to ask a series of questions to the testator before the will is signed and document the answers. If in doubt, a doctor’s opinion should act as sufficient proof as to the validity of the will.

2. Things to address in a will

- Appoint executors
A very important part of creating a will is to nominate the people whom the testator wants to manage and realise the estate’s assets. These are called the executors (they are also known as personal representatives).

The executors named will be responsible for obtaining the grant of probate, and to distribute the estate in accordance with the will. The point that cannot be stressed enough is that the executors are personally liable for any mistakes that they make when winding up the estate. They have to be very careful that all the creditors are advertised correctly, legal assents of titles are done and the deceased’s tax returns for the tax years ending in the six years prior to death are complete.

I have recently saved two executors from a £10,000 claim from a charity. They were not beneficiaries of the will, but friends of the deceased. The will was complicated and the executors had incorrectly filled out the trust and estates tax returns. The total errors in income tax and capital gains tax came to £7,000. In addition, they had not identified that the deceased owed income tax in the six years prior to death, resulting in a £3,000 underpayment.

Had the executors paid all the estate’s value to the charity, the charity could have collected £10,000 from the executors personally as they had not fulfilled their duties. I managed to get a tax repayment of £7,000 on the estate’s tax returns and sort out the personal tax so that the executors were claim free.

Sometimes, it is well worth the executors asking a suitably experienced person to review the estate prior to payment in order to ensure everything has been done correctly. The Revenue’s IHT14 leaflet is a very useful document that gives an insight into the personal representatives’ duties; this can be found on www.inlandrevenue.gov.uk.

- Identify the beneficiaries
Another essential part of a will is for the testator to detail which people he wants to benefit from his estate. Specific legacies (gifts) such as paintings and jewellery can be made or pecuniary legacies (as they are called) which are gifts of fixed sums of money.

The balance of the estate is inherited by detailing who will be the residuary beneficiaries, ie the people who inherit the residue.

It is essential that couples living together both have wills that detail what they want to happen regarding their home, their personal assets and their pensions or life assurance. If no wills are made, then their partners will potentially not inherit anything.

Gifts of UK property are always deemed to be given net of inheritance tax, unless the wills state otherwise. It is very important to identify whether the testator wishes to make a gift of cash from which inheritance tax must be deducted (ie cash gift of £10,000 less £4,000 IHT = £6,000 cash in hand), or whether it is a net gift after tax (ie cash gift of £10,000 = £10,000 cash in hand). There is a big difference in inheritance tax rates charged on these gifts, consider the example below:

	Gross gift	Net gift
	(Subject to IHT)	(Net of IHT)
	£	£
Legacy	10,000	16,667
Less IHT @ 40%	(4,000)	(6,667)
Net cash
To beneficiary	6,000	10,000

This clearly shows that the net gift of £10,000 produces an IHT liability of £6,667 instead of £4,000. The testator should therefore be asked whether he wants this to be the case as any additional IHT paid (in chargeable estates) effectively reduces the residue of the estate, so that less value passes to the residuary beneficiaries.

- Appoint guardians
If the testator’s children are minors, it is always best to identify the people who should act as guardians, so as to look after the children until they become of age.

- Funeral arrangements
The will is recommended to include what the testator wants to happen to their body and the place they wish to be buried or cremated. It should also detail what sort of funeral they want, such as the church (or type of church) and the hymns etc. If the testator wants to donate their organs, it is also helpful to detail this in their will.

3. Potential problems with wills

We have dealt with how to make a valid will and why a will should be made, so let us now consider the potential problems with wills.

Failure of gifts

The most common thing to happen in a will is for a gift to fail. This can happen in any of the following events:

- Legatee predeceases the testator
If a specific gift was made to a person but on the testator’s death that person had already died, then this gift would fail. The gift could succeed if the will specified who the gift would go to in the event of the death of the legatee (person receivingthe legacy), such as the legatee’s children. It is always best to detail this within the will, should the testator want the gift to pass to the legatee’s children.

- Conditional gifts
A gift may fail because the testator details conditions to be satisfied that are unlawful. Examples of these are, if a condition causes the donee to commit a crime, or if the rules against perpetuities are breached (ie only allowed to accumulate income for a maximum of 21 years – then the income has to be paid out).

- Uncertain or contradictory words
Words are given their natural meaning but sometimes wills can be ambiguous, contradictory or obscure. Problems are also caused when words have two natural meanings in their ordinary sense.

If the will cannot be deciphered, a court will need to examine the construction of the words. They can remove or insert or even change words in the original will so as to shed light on their intention. Examples of uncertain words would be ‘my best watch’ or ‘a small portion of what is left’ or ‘a gift to my son’ (when the testator has more than one son). The use of the word ‘family’ should also be avoided. Case law has determined that this is normally only to include the children and spouse. The word ‘grandchildren’ does not include greatgrandchildren, ‘cousins’ only includes first cousins and ‘jewellery’ does not include watches or coins; these must be detailed separately in the will.

‘Money’ has no strict technical meaning. It usually includes cash, money immediately payable to the testator on call and money at bank or deposit accounts. It can however include investments readily convertible into money and also include the whole of the testator’s estate. Money therefore has an extremely wide meaning, and ,as a result, it may be best to use ‘ready money’ so as to only include cash and instant access cash from banks.

If the court cannot put a clear meaning on a word, that part of the will can be unenforceable and therefore void. The words ‘occupy’ or ‘reside’ as to a residence are also uncertain words as these by themselves do not indicate a period of time.

- Donee must be identifiable
The donee must be named and identified with certainty otherwise the gift is void. If the person is known by any other name, this should also be stated in the will.

- Dissolution or annulment of marriage
Obviously if a will is not updated to reflect a divorce, then the testator giving, say, ‘half his assets to his wife’ will fail, because she is no longer his life at the date of his death.

Inheritance tax planning is yet another issue on top of the points raised above, which obviously needs to be considered when writing a will. Many of the discretionary will trusts already set up may not achieve any inheritance tax savings. The most common circumstance will be when the testator transfers his old matrimonial home into trust on his death where the surviving spouse is allowed to live there rent free.

Peter Twiddy, assistant director of IR Capital Taxes, indicated in October 2003 that the Revenue will argue that the surviving spouse has an interest in possession in the matrimonial house contained in the trust. As per Inheritance Tax Act 1984 s49, even a current right to use that asset will amount to an interest in possession, therefore the house in the trust will be assessed to IHT on the date of the final spouse’s death.

I have always told my clients that this would be the Revenue’s stance, and that by not charging a full commercial rent the Trustees would be in breach of the Trustee Act 2000. I have however argued that if it is run as a commercial arrangement, that the discretionary will trusts would work. Peter Twiddy also confirmed this to be the case in his October 2003 talk. Estate planning can be very effective, but only if done properly in all cases.

The case law is immense on all of the above subjects, but this article was only intended to give a ‘quick’ overview of how to write a valid will, the consequences of not having a will, and the potential problems encountered.

A will is a relatively inexpensive document and can cost from as little as £100. In my professional life, I have never met a family who have regretted making wills. However, quite often I have had to sort out the complications brought about by not making them. Please don’t be in the 70% who die without a will, otherwise you may leave behind problems (that are mostly avoidable) that may take years for your families to resolve.

This article has only dealt with the position under the law in England and professional advice must be sought in all cases.

NICK WATERHOUSE-BROWN BSc (HONS) ACA CTA
Nick Waterhouse-Brown is a Chartered Accountant and Chartered Tax Advisor who specialises in all kinds of tax planning forclients. He works as a Tax Manager for Ansons LLP Solicitors who have offices in Lichfield and Cannock.

This article has previously appeared in ‘Tolley’s Practical Tax’ and is reproduced with the kind permission of Lexis Nexis UK.