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Tolley's Practical Tax by Nick Waterhouse-Brown

Nick Waterhouse-Brown, Tax Manager for Ansons LLP Solicitors, explains the consequences arising from not having a will (in England and Wales) in Part 1 of a 2 Part articleFor most of us, one of the last things we want to do is to think about dying. Whilst we're here on earth, we try to think of nice things in life, such as being with our children and families.

Unfortunately, we can't always expect to live to a ripe old age - life just isn't like that!

In the UK approximately 750,000 people die per year, and almost 70% of them die without a Will, therefore die "intestate".

When a person dies intestate, the law is deemed to decide how the assets are inherited. The intestacy table (see later) shows how the assets might pass under a number of different situations.

Let us consider a few examples so that we can understand how the intestacy rules operate in practice.

Example 1 - husband dies leaving a wife and 2 children

Assume Mr Jones died leaving his half of his house worth £150,000. This house was held as a tenancy in common. He also owned £100,000 cash in his own bank account. No other assets were held. He left a wife and 2 children but did not make a Will.

* In this case (referring to the intestacy table) Mrs Jones would be deemed to inherit all his personal assets (such as watches, clothes etc), the first £125,000 value of the house, and a life interest in half of his remaining assets being £12,500 of the house (£150,000 less £125,000 given = £25,000/2) plus £50,000 cash.

* Her children would inherit equally between them £12,500 of the house and £50,000 cash absolutely.

* The £12,500 of property plus the £50,000 cash would be held in a trust that would be obliged to pay all its income to Mrs Jones during her life.

* Mrs Jones would not be able to access the capital in the trust unless they wound it up under complex provisions, even then she may not be able to get an equivalent to half the capital (i.e. £62,500).

* To make things worse, if Mrs Jones fell out with her children, they could force a sale of her house, even though their interest in the house was only worth £12,500.

* On Mrs Jones's death, assuming a nil rate band of £263,000 (2004/5 rate), and no change in the values above, there would be £29,800 of inheritance tax "IHT" to pay. This would be made up of:

	£
House value
Half interest as tenants in common plus	150,000
£125,000 inherited	125,000
	275,000
Market value of the interest in possession trust (included in estate as per s49 IHTA 1984)
- value of the house	12,500
- value of the cash	50,000
Total value of estate on death	337,500
Less nil rate band on death (assume)	(263,000)
Chargeable estate	74,500
Inheritance Tax at 40%	29,800

Solution:

If Mr Jones died with a Will, he would have bequeathed his half of the house to a discretionary trust where his two children were the beneficiaries. The £100,000 cash would have been given to his wife. To avoid the Inland Revenue arguing that Mrs Jones had an interest in possession in the trust (i.e. a current right to use that asset - therefore forming part of her estate on her death) the trustees would charge Mrs Jones a commercial rent to use that half of the house.

I would estimate that the rent payable on half the house in this instance would be approximately £5,000 per year. The trust would pay 40% income tax on the rental income, but if the daughters were lower tax payers' or non tax payers', the effective rate of tax paid on the rent would be 22% or 0%. Please do not forget to put the details of any payments of income made out of the trust to the beneficiaries on R185 forms.

Assume Mrs Jones died 2 years after her husband, her estate would be worth approximately £250,000, and no inheritance tax would be payable.

Example 2 - husband and wife tragically die in a car crash - no Wills were made

A) If died together without any children or parents

Under law, if a couple die in tragic circumstances (and it is not known who died first), the older of the two will be deemed to die first under section 184 of the Law of Property Act 1925. If we assume the husband was 2 years older than his wife, and they own a house worth £250,000 as joint tenants and each have bank accounts in their own names worth £100,000.

The intestacy rules are subject to a 28 day survivorship rule under section 46 of the Administration of Estates Act 1925, so if the spouse dies within this time, the intestacy rules state that the intestate estate will be dealt with as if there had been no spouse.

WIFE'S ESTATE

Legally all assets held as joint tenants go to the surviving tenant - this is not subject to the intestacy rules.

* The wife will therefore be deemed to inherit the whole house worth £250,000 under the joint tenancy rules.

* As she died within 28 days, she will not inherit any other of her husband's assets.

* At this point her estate will be worth £350,000 (£250,000 house plus £100,000 of her cash).

* The whole of this money will pass under the intestacy rules to her brothers and sisters, or failing that to her aunts or uncles, or if no family members survive all the value will pass to the Crown.

* As her estate is worth more than the £263,000 nil rate band, her estate will be liable to pay £34,800 inheritance tax..

HUSBAND'S ESTATE

* The wife has already inherited the house, so his estate will only be worth £100,000.

* Under the intestacy rules £100,000 will pass equally to his brothers and sisters. If he has no siblings, then they will pass to his aunts or uncles, if no family is left, then it falls to the Crown.

Summary

* Husband - passes £100,000 to his family.

* Wife - passes £315,200 to her family.

This is quite an inequitable result, all due to the fact that the couple died without Wills.

B) If the wife died 30 days after husband - both have parents who survive

* In this instance, she would inherit all her husband's assets.

* On her death, her estate would be worth £450,000 (£250,000 house plus £200,000 cash).

* £74,800 of inheritance tax would be payable on her death (no inheritance tax would be payable on her husband's).

* Under the intestacy rules, £375,200 (£450,000 less £74,800 IHT) would pass to her parents.

* Nothing would pass to her husband's parents in the absence of a Will.

Summary

* Husband - passes nothing to his family.

* Wife - passes £375,200 to her family.

Solution:

If both the husband and wife had made Wills prior to their death's, all their families could have benefited from their joint estate. I would have changed their house from joint tenants to tenants in common, each family would have received £225,000, and their estates would have been free from inheritance tax, therefore saving £34,800 (if the wife died instantly) or £74,800 (if she died 30 days later).

If Wills had been prepared prior to death, it would have also saved the parents a lot of time, expense and hassle, as both husband and wife would have died with an excepted estate. This means that no inheritance tax accounts would have had to have been completed and sent to the Inland Revenue, the grant of probate would have been easier, and the winding up of the estate would have taken less time.

Conclusion

I hope this article highlights the problems caused by dying without a Will. In many cases it can have inequitable and profound effects on the surviving spouse or other family members, leaving them insufficient finances and also with legal problems.

So please make the transition between this life and the next as easy as possible by making a Will! As with all legal documents, it is always recommended to use a suitably qualified and experienced solicitor, either in the drafting of the Will, or to approve it prior to signing. This will ensure that no "nasty" surprises are uncovered after that person dies.

Part 2 of this article will deal with the legal requirements to make a valid Will, what to include in the document and the potential problems.

This article has only dealt with the position under the law in England and Wales, not the law in Scotland or Ireland. The effect may be similar, but professional advice must always be sought in all cases.

Nick Waterhouse-Brown is a Chartered Accountant and Chartered Tax Advisor who specialises in all kinds of tax planning for clients. He works as a Tax Manager for Ansons LLP Solicitors who have offices in Lichfield and Cannock. He can be contacted on 01543 267195 (direct dial) or alternatively by e-mail on nwaterhousebrown@ansonsllp.com

This article is reproduced with the kind permission of Lexis Nexis UK.