A common misconception
When I die, everything I own will automatically pass to my spouse, civil partner or “common law” partner, won’t it? Making a Will is an expense I can do without.
Not necessarily!
The spouse or civil partner is entitled to the “chattels” (personal effects, cars etc) and the first £125,000 of the estate. They also receive one half of the balance of the estate, in trust, for life. The other half of the balance of the estate passes to the children, either immediately if they are over 18 or in trust until they reach that age.
For example, Mr Smith died leaving a wife and two children, John and Jane, both of whom were over 18. The value of his estate for inheritance tax purposes, when all his assets had been realised and his debts paid, was £200,000, plus chattels of £20,000. The estate was below the current threshold for inheritance tax of £312,000 so no IHT was payable.
Mrs Smith therefore inherited:
£125,000 allowance
£ 20,000 chattels
£ 37,500 half the balance of the estate in trust.
John and Jane inherited: £18,750 each.
The problem
However, if the £200,000 comprised £10,000 in cash and £190,000 being the family home, owned solely in Mr Smith’s name, Mrs Smith would either have had to take out a mortgage, in order to stay in the house and pay the children, or sell the property and move elsewhere.
If Mr and Mrs Smith had no children, different rules apply. When Mrs Smith died, if her husband had already passed away, her estate (comprising say £200,000) would be divided in proportions laid down by the law between her family. It is entirely possible therefore that their hard-earned money would be
inherited by people she did not like or, worse, did not even know!
Where a couple are not married or in a civil partnership, the surviving partner has very few rights and the estate would be divided equally between the deceased’s children or, if there is no issue, their parents and then brothers and sisters.
Additional complications can arise in step-family situations, whether the couple is married or not. They may find that their nearest and dearest are not as protected as they thought.
House prices in the South East of England have increased rapidly over the last few years, and many of us are shareholders to a greater or lesser extent, so that beneficiaries who thought Inheritance Tax was only payable by the wealthy find themselves giving 40% of their loved ones’ money to the Chancellor of the Exchequer.
The solution
All these difficulties can be avoided by investing a little time, effort and money in taking sound advice and making a proper Will. This allows you to:-
- Specify whom you wish to deal with your affairs
- Specify who should get what of your personal effects
- Specify who should get how much of your money
- Put your assets in a trust for the benefit of your spouse or civil partner
- Protect your assets for the use of your ultimate beneficiaries
- Ensure your beneficiaries don’t pay more tax than necessary
Clarkson Wright & Jakes offer free seminars on Community Care, Inheritance Tax Planning and Lasting Powers of Attorney on the last Thursday of each month at our offices in Valiant House, Knoll Rise, Orpington. If you would like to attend please contact SHELAGH FLEMING on 01689 887874 quoting reference WMW1 to reserve a place.
Glossary
Will
The document signed by the person making the Will specifying who they want to inherit what (and how much) from their estate
Bequest
Usually specific items belonging to the Testator, eg paintings, furniture, jewellery etc
Beneficiaries
People who benefit from the Estate
Issue
Children, grandchildren, great grandchildren etc
Assets
All the possessions you own at the time of your death, such as property, pensions, investments, shares, savings, vehicles, paintings etc
Estate
The difference remaining when your assets have been converted into cash and your debts have been paid
The Deceased
The person who has died
Executors
If a person dies leaving a Will, the document will usually name one or more people to act as the Executors. It is their job to finalise the financial affairs.
Grant of Probate
When a person dies with a Will the Executor needs to obtain a court sealed document from the Probate Registry called a Grant of Probate. This document enables the assets to be transferred from the name of the deceased to the beneficiaries of the Will.
Personal Representatives
This is a term that covers both Executors if there is a Will or Administrators if there is no Will.
Inheritance tax
This is a tax payable when an individual dies. If a person has assets over the Nil Rate Band Allowance (£300,000 for the tax year 2007/2008), inheritance tax will normally be paid at a rate of 40%, the exemptions being the surviving spouse and charity.
Testator or Testatrix
Person making the Will
Legacy or Pecuniary Bequest
Specific amount of money left in a Will to a person or charity
Chattels
Moveable items, such as personal effects, cars etc
Per Stirpes
If a beneficiary dies before the deceased, and no provision has been made for this event, their share is divided proportionately between any surviving children or grandchildren
Liabilities
Any debts you owe at the time of your death including funeral expenses, mortgage, tax, credit card bills, utility bills, overpaid pensions etc.
Residue
The cash remaining when all legacies and bequests have been paid
Intestate
The condition of the Estate when the person has not left a Will
Administrators
If a person dies without leaving a Will, the law has specified, under what are called the Intestacy Rules, who can wind up the deceased’s financial affairs. These are known as Administrators. It is their job to finalise the financial affairs.
Grant of Letters of Administration
When a person dies without a Will the Administrator needs to obtain a Court sealed document from the Probate Registry called a Grant of Letters of Administration. This document enables the assets to be transferred from the name of the deceased to those entitled under intestacy
Grants of Representation
This is a term that covers both Grants of Probate or Grants of Letters of Administration.
Deed of Variation
This is a legal document enabling either the Will or the Intestacy Rules to be varied within a period of two years from the date of death. This is often used to reduce your inheritance tax.
