The Benefits of Writing a Will

Having a valid Will is one of the fundamental issues that any individual concerned with financial matters must address. When advising on inheritance tax (IHT) planning the first question that needs to be asked is about the Will – whether one has been made and, if so, what its provisions are. Apart from the fact that having a Will means that the client decides who benefits from their estate on their death, the inclusion of appropriate provisions in a Will can provide the opportunity to save substantial amounts of IHT.

What you need to know

You need to be able to articulate to clients the importance of having Wills in place to enable them to make sure they are in control of who inherits from their estate. Wills can also be used to create trusts on death to cater for different needs of beneficiaries especially minor children and vulnerable individuals who may be unable to look after their own affairs.

Fundamentals

The intestacy rules

Where an individual dies without a Will, the law dictates who inherits the deceased’s property. The legal term for this is intestacy. Different rules apply depending on which country in the UK the deceased is domiciled.

Reasons for making a Will 

• To choose beneficiaries and executors - the most obvious reason to make a Will is to ensure that those (and only those) you want to benefit from your estate after you die will in fact benefit. Making a Will also allows the client to choose who will administer and distribute the estate on their behalf.
• To make specific arrangements for minors. Where a minor child inherits on intestacy, his or her entitlement will be held on statutory trusts until he or she attains the age of 18. By making a Will, the testator is able to choose their trustees, dictate the terms of the trust (imposing conditions and controls as necessary) and ensure that the trustees have full and modern powers of administration.
• To exercise control over the ultimate destination of property – Will trusts can be useful where it is desired to create successive interests in property. An example might be where a testator, who has children from a previous marriage, would like to provide financial security for a new partner if she survives him but would ultimately like the capital to be preserved for his own children.
• To deal with foreign property - many individuals these days acquire holiday or second homes abroad. Whilst leaving assets without a Will in one’s home country is bad enough, it gets significantly worse if properties are owned in other jurisdictions. There would be considerably more cost as well as the fact that in certain European countries the law prescribes who must inherit on a person’s death. A UK Will is likely to be accepted in most European countries, although sometimes it is recommended that a local Will is also executed in respect of any property situated in that country that mirrors the provisions under the UK Will. Clients in such circumstances will need to consider the implications of the EU Succession Regulation 650/212.
• To secure IHT savings – where an intestate estate is greater than ￡250,000 and the deceased left children, part of the nil rate band will inevitably be utilised on first death – thereby depriving the survivor of the opportunity to benefit from a percentage uplift in (what is likely to be) an increased nil rate band amount on second death under the transferable nil rate band rules (see below). Making a Will can also enable the use of more than two full nil rate bands where one (or both) of a married couple/civil partnership has transferable nil rate band accruing from a previous marriage.
• To ensure that, where appropriate, the residence nil rate band (see below) is available to its maximum. To qualify for this the Will must provide that the residence of the testator (or assets representing its value when such a residence has been disposed of during lifetime, for example by downsizing) is left to lineal descendants (broadly children or grandchildren) or their spouses/civil partners. This includes certain trusts, but not a discretionary trust.

Planning

Nil rate band planning and the transferable nil rate band (TNRB) 

In most cases married couples/civil partners will want to ensure that the entire estate passes to the surviving spouse/civil partner on first death. However, until October 2007, this would have ‘wasted’ the nil rate band.

To allow access to assets for the surviving spouse whilst at the same time ensuring that the nil rate band available on the death of the first of them to die was not wasted, it was common for couples to include a nil band discretionary trust in their Wills which would apply on the first death. 

The transferable nil rate band provisions, which were introduced in October 2007, have rendered this type of planning largely redundant by providing that any nil rate band unused by the first spouse or civil partner to die (determined in percentage terms) can be claimed on death of the survivor. 

Consequently, (unless asset values are expected to grow at a faster rate than the nil rate band) the primary tax reason for using a nil rate band trust no longer exists. However, for many individuals there will be other – tax and non-tax - reasons for still using nil rate band trusts in their Will – for example if:

• there is a desire to protect the assets of the surviving spouse/civil partner from a claim from the local authority if he/she goes into care;
• one of the spouses/civil partners has transferable nil rate band accrued from the death of a former spouse/civil partner (the transferable nil rate band rules only allow for a maximum of two nil rate bands to be claimed on death of a surviving spouse/civil partner (regardless of how many spouses he or she may have survived) but by using a nil rate band Will trust there is potential for multiple nil rate bands to be utilised);
• 
  
• the estate is significant and it would be IHT advantageous to be able to create debts against the estate of the surviving spouse/civil partner so as to further reduce the estate on second death;
• the spouse/civil partner who dies first wishes to keep control over who eventually benefits from his/her assets.

Depending on the wishes of the individuals concerned the residue would typically pass either absolutely to the surviving spouse/civil partner or to a trust under which the spouse/civil partner has a life interest.

Residence nil rate band planning 

An additional IHT allowance has been available since 6 April 2017 in respect of a residence which the testator owns or has owned in the past. This is called the “residence nil rate band” (RNRB) and isgiven by an increase in the nil rate band available to the individual. It started at ￡100,000 in tax year 2017/18 and will go up to a maximum of ￡175,000 for tax year 2020/21.

What is important for will planners is that the RNRB will only be available when a “qualifying residential interest” (an interest in property that has at some time during the period of ownership been occupied by the deceased as a residence) is 'closely inherited' (that is, inherited by lineal descendants or their spouses/civil partners).

Lineal descendants include children, grandchildren and remoter issue, adopted children, step children and foster children.

Clearly for those who wish to maximise the use the RNRB it is important that the Will provisions ensure that the relevant legacies qualify.

Unused RNRB is transferable to a spouse/civil partner in the same way as the normal NRB.

Tax-efficient gifts to children and other vulnerable beneficiaries

As we have noted, where there is an intention is to benefit minor children, it will often be a good idea to make the gift subject to trust so that controls and conditions can be imposed. This is particularly relevant where significant sums are involved as few testators would feel comfortable at the prospect of 18 year old beneficiaries having free reign over substantial wealth. 

Where a testator wishes to make provision for a disabled or vulnerable person, ensuring that the gift is structured so as to prevent anyone other than the disabled person being able to benefit from capital or income during the disabled person’s lifetime can give rise to significant tax advantages.

Using Will trusts for non-tax reasons

Where a testator wishes to keep control over the ultimate destination of their wealth, he/she could consider using a life interest trust in their Will. Since 22 March 2006, life interests that are created on death are known as immediate post-death interests (IPDIs) and are not subject to the IHT charges associated with the relevant property regime (contrast a similar trust that is created during lifetime). Instead, the person with the IPDI is treated as owning the trust fund for inheritance tax purposes (and where that person is the spouse/civil partner of the deceased, the gift will qualify for the spouse/civil partner exemption)

Charitable giving

Outright gifts to charity are exempt from IHT whether made on death or during lifetime. However, where someone leaves at least 10% of their net estate to charity, rules introduced in April 2012 mean that the rate of IHT on the rest of the estate can be reduced from 40% to 36%. Professional advice is essential to ensure that the Will is drafted in such a way that the 10% reduction in IHT applies.

For more information please call us on 01737 225989.