Appendix A - Frequently Asked Questions

Appendix B - Rules of Intestacy - England & Wales

Dying without leaving a Will could mean... 

In the absence of a signed Will the government dictates who gets what of your estate, depending on your domestic circumstances: 

Married with Children (separated people are treated under these rules as still being married)

  1. Your spouse gets:
    1. car and house contents, plus
    2. first £250,000 of your estate (prior to 1st Feb 2009 was £125,000), plus
    3. 6% interest on half of any surplus (only interest, your spouse cannot touch the capital)
  2. Your children (stepchildren get nothing) get:
    1. half of any excess over £250,000 outright, plus
    2. the other half of the excess when your spouse has also died

Married with No Children but with Parents and/or Brothers and Sisters

  1. Your spouse gets:
    1. car and house contents, plus
    2. first £450,000 of your estate (prior to 1st Feb 2009 was £200,000), plus
    3. half of any excess over £450,000 outright
  2. Your parents or (if none alive) your brothers and sisters get:
    1. Balance i.e. half of any excess over £450,000 outright

Married with No children and No Parents or Brothers and Sisters 
Your spouse gets everything 

Single, Widowed or Divorced (but not separated) 
Everything goes to your children (if any), otherwise to your parents (if alive), otherwise to your brothers and sisters (or their children), otherwise your grandparents (if alive), otherwise your uncles and aunts (or their children), otherwise to the government! 

Appendix C - Rules of Intestacy - Northern Ireland

Dying without leaving a Will could mean... 

In the absence of a signed Will the government dictates who gets what of your estate, depending on your domestic circumstances. From 1st January 2008 the rules are: 

Married with Children (separated people are treated under these rules as still being married) 

1) Your spouse gets:

  1. car and house contents, plus 
  2. first £250,000 of your estate, plus 
  3. if only one child or their issue survives - one half of any surplus
  4. if more than one child or their issue survives - one third of any surplus

2) Your children (stepchildren get nothing) get:

The remainder of any surplus (subject to 1c or 1d above)

Married with No Children but with Parents and/or Brothers and Sisters (whether of the whole or half-blood) or the issue of a deceased brother or sister 

1) Your spouse gets:

  1. car and house contents, plus 
  2. first £450,000 of your estate, plus 
  3. half of any excess over £450,000 outright

2) Your parents or (if none alive) your brothers and sisters (whether of the whole or half-blood) or the issue of a deceased brother or sister get:

  1. Balance i.e. half of any excess over £450,000 outright

Married with No Children and No Parents or Brothers and Sisters (whether of the whole or half-blood) or the issue of a deceased brother or sister

Your spouse gets everything

Single, Widowed or Divorced (but not separated)

Everything goes to your children (if any), otherwise to your parents (if alive), otherwise to your brothers and sisters (whether of the whole or half-blood or their children), otherwise your grandparents (if alive), otherwise your uncles and aunts (or their children), otherwise to the government!

Appendix D - Rules of Intestacy - Scotland

Definition: 
Moveable estate is money, shares, cars, furniture and jewellery. Heritable estate is land and buildings 

Note: Any share of the "moveable estate" is after debts have been paid and any "prior rights" of a spouse have been settled. 

Intestacy Rules for Scotland 

Where there is no Will, the spouse has "prior rights" to the estate. This is a first legal claim on the estate before "legal rights" as below. The spouse and children then have "legal rights" to shares of the deceased's moveable estate. 

Deceased survived by spouse and children 

  1. Prior rights, spouse gets:
    1. Property (value up to £300,000)
    2. Furniture and furnishings (value up to £24,000)
    3. Legacy (value up to £42,000)
  2. Legal rights, moveables (balance remaining) are shared:
    1. One third to surviving spouse
    2. One third to children (or their issue) equally
    3. One third (known as dead's part) to Free estate
  3. Free estate i.e. all estate remaining after debts, prior rights and legal rights
    1. All to children (or their issue) equally

Deceased survived by spouse but no children 

  1. Prior rights, spouse gets:
    1. Property (value up to £300,000)
    2. Furniture and furnishings (value up to £24,000)
    3. Legacy (value up to £75,000)
  2. Legal rights, moveables (balance remaining) are shared:
    1. One half to surviving spouse
    2. One half (known as dead's part) to Free estate
  3. Free estate i.e. all estate remaining after debts, prior rights and legal rights
    1. If parent(s) and brothers/sisters alive:
      1. One half to parent(s) jointly
      2. One half to brothers/sisters, otherwise
    2. If brothers/sisters alive but no parents:
      1. All to brothers/sisters equally, otherwise
    3. If parents(s) alive but no brothers/sisters:
      1. All to parent(s) jointly, otherwise
    4. If no parents and no brothers/sisters:
      1. All to spouse

Deceased survived by children but no spouse

  1. Prior rights (not applicable)
  2. Legal rights, moveables (balance remaining) are shared:
    1. One half to children (or their issue)
    2. One half (known as dead's part) to Free estate
  3. Free estate i.e. all estate remaining after debts, prior rights and legal rights
    1. To children (or their issue) equally

Deceased with no spouse and no issue

  1. 1) Prior rights (not applicable)
  2. Legal rights (not applicable)
  3. Free estate i.e. all estate remaining after debts, prior rights and legal rights
    1. If parent(s) and brothers/sisters alive:
      1. One half to parent(s) jointly and
      2. One half to brothers and sisters equally, otherwise
    2. If brothers/sisters alive but no parents:
      1. All to brothers/sisters equally, otherwise
    3. If parents(s) alive but no brothers/sisters:
      1. All to parent(s) jointly, otherwise
    4. If no parents and no brothers/sisters:
      1. All to uncles/aunts, but if none
      2. All to grandparents, but if none
      3. All to grandparents' brother/sisters, but if none
      4. All to remoter relatives, but if none
      5. To the Crown

If the deceased has made a Will (Scotland) then: 

  1. Prior rights (as above) do not apply 
  2. Legal rights (as above) do apply (even if the Will is to the contrary) 
  3. However, a spouse or child exercising their "legal rights" cannot have a gift from the Will plus their "legal rights". They must choose, one or the other. 

The Will is only concerned with the estate after "legal rights" have been settled unless those "legal rights" have been relinquished, perhaps in favour of a larger gift from the Will. 

Appendix E - Inheritance Tax & How To Avoid The Taxman

Current UK legislation (as of April 2009) allows for the first £325,000 of your estate to be free from Inheritance Tax. However, although this may sound considerable, when you add up the value of your house, savings and investments and your personal affects, you may be very surprised by how much you are actually worth. With house prices rising as fast as they are, the value of your estate is likely to be a great deal more than the £325,000 Inheritance Tax threshold.

If at the time of your death you are a widow/widower or bereaved civil partner then this allowance is 2 x £325,000 = £650,000. 

Consequently, under current legislation, the taxman will take 40% of everything you leave over the current £325,000 or £650,000 limit. 

Many financial advisers believe that this tax can be reduced if not eliminated with some straightforward planning. We do not propose to offer in depth Inheritance Tax advice here as your best course of action would be to sit down with an independent financial adviser who can do a full fact-find of your situation, take account of all your current and likely future circumstances and advise you as to your best course of action. 

ALLOWANCES

Your Personal Allowance 
Each person currently has, on death, an allowance of £325,000 called the nil rate band, which includes: properties, personal effects, cars, savings, investments and insurance - collectively known as your Estate. For widows/widowers and bereaved civil partners this is increased to 2 x £325,000 = £650,000. 

Spouse Exemption 
It is important to note that there is no Inheritance Tax on transfers (gifts), whatever the value, between married couples or civil partners. However, if your spouse or civil partner is non domiciled then the allowance is limited to £55,000. 

Annual Exemption 
Everyone can give away up to £3,000 per tax year, say, to one child or shared between other children. Obviously, for a couple these would mean a maximum of £6,000. 

Marriage Gifts Exemption 
Parents can make wedding gifts of up to £5,000 to each of their children. Other relatives e.g. grandparents, can, however, also make gifts. They can give up to £2,500 to each marrying grandchild. Also, you can give up to £1,000 as a wedding gift to anyone else. The gifts must be made before the wedding day, not after. 

Small Gifts Exemption 
You can make any number of gifts to different people up to a value of £250 each in any tax year. 

Other Gift Exemptions 
You can make any number of gifts of any amount out of your surplus income. In other words, as long as the gift is not coming from your capital or savings and your income can be proven to have funded the gift then it is permissable. Other gifts that are permissable are gifts to charities and political parties. Also acceptable are gifts to Trusts for the vulnerable.

Business and Agricultural Relief
Interest held for more than 2 years in a business, farms or shares in qualifying unlisted companies and let farmland held for more than 7 years qualifies for 100% relief. Assets used by a qualifying company or business, or a controlling holding in a listed company qualifies for 50% relief.

Potentially Exempt Transfers (PET) 
In most cases any amount over the exempt gift allowances, as previously mentioned, is a Potentially Exempt Transfer (PET). PETs can be given to the person concerned directly or as an investment for them. 

This means that the donor, needs to live at least 7 years, from the date when the transfer is made, for this gift to fall outside of the estate. During the 7-year period the amount of Inheritance Tax payable reduces the longer the time after the gift has been made. This is known as Taper Relief. 

Taper Relief, however, does not apply to any gifts below the nil rate band, i.e. £325,000, but is applied to gifts over the nil rate band. In other words, taper relief is given on the part of a gift over £325,000. 

Period of Years before death % reduction (i.e. tapering relief)
0-3 years NIL
3-4 years 20%
4-5 years 40%
5-6 years 60%
6-7 years 80%
More than 7 years No tax

Will Trusts

For unmarried heterosexual couples and same sex partners who are not civil partners ONLY - If each spouse of a couple were to include in their Will a gift to anyone other than the other spouse then this would be an excellent way of reducing Inheritance Tax. This is because it uses the first spouse's nil rate band. 

Consequently, done this way, both spouses could together leave their children 2 X £325,000 resulting in a total of £650,000 free of Inheritance Tax. 

However, if the surviving spouse feels they may need an income from the monies that may be willed to the children, then they may be reluctant to give monies outright. 

One method, increasingly popular, is a Will Trust arrangement. On first death monies are placed in Trust for the children, with the surviving spouse allowed interest free loans from it. 

IOU Discretionary Will Trust

For unmarried heterosexual couples and same sex partners who are not civil partners ONLY - Most couples leave their estate to each other when they die. Then, when the second one dies, the taxman takes his share of 40% on everything over £325,000 (tax year 2009/10).

However, with an IOU Discretionary Will Trust written into both partner's Wills it could mean that they could collectively pass on to their family up to twice that amount (£650,000), thus saving a current maximum of £130,000 in Inheritance Tax.

Who is the IOU discretionary Will trust suitable for?
It is suitable ONLY for unmarried couples and same sex partners who are NOT civil partners that are looking for the following:

  • A way of reducing their liability to inheritance tax (Inheritance Tax)
  • Access and control over their capital during their lifetime
  • A way of making use of their nil rate band on first death
  • Protecting capital for their beneficiaries, following their death

How does the Trust work?
By including within each partner's Will the wording for an IOU Discretionary Will Trust the estate (up to the nil rate band) of the first person to die will pass to the trust with any balance over this amount commonly going to the surviving partner. See example below

Use of the family home
For such an arrangement to be effective it may require the ownership of the home to be either in one of the couple's sole name or under a tenancy in common arrangement allowing them both to leave a fixed share of the home to whoever they wish in their Wills. Your Will Adviser can usually arrange the change to tenants-in-common if necessary. 

However, there are still problems to be overcome if the surviving partner wishes to continue living in the property after the first partner has died otherwise the whole Inheritance Tax effectiveness of the trust would be undermined. Here below is a popular solution.

A way to use the family home
Within the Discretionary Will Trust, wording must be included giving special powers to the trustees appointed to take a legal charge over the assets that pass to the survivor on first death or to accept an "IOU" from the survivor, as an asset of the trust. With the use of an IOU, the estate (and their share of the home) of the first person to die can go wholly to their surviving partner with the trust simply consisting of the IOU provided by the survivor. 

Therefore, on the second death, the trustees would redeem their charge or IOU and this would be funded from the survivor's estate.

Caution: For couples where one partner has never contributed financially to the purchase of the family home For couples in this situation, including the family home in an IOU Discretionary Will Trust may not work should the non-contributor die first. This is following a ruling won by the Inland Revenue in April 2007 concerning the late Mrs Phizackerley and her husband Dr Phizackerley.

As Mrs Phizackerley had never worked or contributed financially to the purchase of the family home then, in spite of the property being owned as tenants-in-common and on her death her gifting her share to an IOU Discretionary Will Trust, it was deemed that for IHT purposes the home should be regarded as belonging wholly to Dr Phizackerley who died last and therefore subject to IHT as part of his estate.

However, in the Daily Mail's Moneymail supplement 18th April 2007, IHT expert barrister Emma Chamberlain of 5 Stone Buildings is quoted as saying that to avoid this you need to make sure the debt created on the first death is in the form of a charge or mortgage against the property rather than take on any personal liability for it. The debt is repaid on the second death. 

An example of an IOU Discretionary Will Trust Showing a saving of £130,000 in Inheritance Tax

Mr Jones and Ms Smith jointly have assets worth £650,000. To maximise the Inheritance Tax savings, they have to "equalise" their estate so that they each own assets at least equalling the current nil rate band of £325,000 (tax year 2009/10). For this example, this includes transferring joint investments into their sole names and changing the ownership of their house from joint-tenancy to tenants-in-common. This example presumes Mr Jones dies first.
   
Mr Jones' Assets: £325,000
 
Ms Smith's Assets: £325,000
 
On Mr Jones' death:
All assets pass to Ms Smith in return for an IOU for £325,000 which she gives to the Trust
Ms Smith's Assets:   £325,000
Plus Mr Jones' Assets:   £325,000
     
Total:   £650,000
Less IOU Outstanding:   £325,000
IOU Discretionary Will Trust:
Contains IOU for £325,000
 
On Ms Smith's death:
Assets less tax pass to the children
 
On Ms Smith's death:
IOU is repaid by her estate & the money in the trust is now paid Inheritance Tax free to the children
Ms Smith's estate gross:   £650,000
Less IOU Repaid:   £325,000
Less Tax:   NIL
Balance left to children:   £325,000
 
Once both Mr Jones & Ms Smith have died:    
Children receive proceeds of Trust when IOU repaid:   £325,000
Plus balance from Ms Smith's estate:   £325,000
     
Total:   £650,000
     
     
Taxman receives:   NIL

Flexible Trusts, Discounted Gift Schemes and Life Assurance

There are other methods of giving while you are alive which can reduce your Inheritance Tax liability on death. For further details on these options you should speak to your independent financial adviser. 

If you do not have an independent financial adviser at present then Will Drafters will be able to introduce one to you, so please don't hesitate to ask. 

Appendix F - Glossary of Legal Terms

Administrator 
A person appointed when either no Will can be found or there is no executor to carry out the intentions of the Will. 

Administration, Letters of 
Granted by a court to administrators (usually the next of kin) to give them the authority they need to act and to administer/distribute the estate where there is no Will. 

Assets 
Generally everything that you own. 

Beneficiary 
Someone who will inherit from the Will, a trust or under the intestacy laws. 

Bequest 
A gift left in a Will. 

Chargeable gift 
A gift on which Inheritance Tax may be payable. 

Codicil 
A document executed by a testator subsequent to the Will which alters, cancels or adds to the provisions of the previously drafted Will. 

Devise 
A gift by Will of freehold property. 

Executor 
A person appointed in the Will to administer the estate.

Guardian 
Someone appointed to look after the interests of a child under the age of 18. 

Inheritance Tax 
Tax payable on the transfer of assets either during an individual's lifetime or on his or her death. 

Intestate
A person who dies without making a valid Will. 

Legacy 
A gift of a specific item left in a Will, apart from land. 

Life Interest 
The right to enjoy for life (or until a specified time period has elapsed or an event has occurred, like someone remarrying) either money or property which will eventually revert to the original estate in some way on death - instructions are included in the Will as to what should happen to the gift when the life interest ends. 

Moveable Property 
Anything other than buildings or land. 

Pecuniary Legacy 
A gift of money under a Will. 

Potentially Exempt Transfer (PET) 
A gift made during ones lifetime that is exempt from Inheritance Tax if the donor lives for seven years after making the gift. 

Predeceased 
Someone who dies before the person who has made the Will. 

Probate, Grant of 
The document which confirms to executors that they have authority to act, and which validates the Will. 

Residue 
What is left of the estate after the payment of all debts, taxes, administration expenses, legacies and bequests under the Will. 

Reversionary Interest 
Interest in trust property. 

Specific Legacy 
A gift of a specific object under a Will. 

Testator/Testatrix 
The person (male/female) who makes the Will. 

Trust 
An arrangement by which property is handed over to trustees to be applied for the benefit of other people known as beneficiaries.

Trustee 
The person who holds property on behalf of another person and is responsible for administering the trust assets.

Variation, Deed of 
An arrangement whereby certain provisions under a Will may be varied by consent of the beneficiaries. 

Will 
A form of instructions as to how someone wishes to dispose of their assets on death. 

Registered Office: 1st Floor, 797 London Road, Croydon CR7 6AW | Tel. No: 0800 269 297020 8664 3200

Registered in England No: 2527040 | VAT No: 574-0269-37 | Directors: David S Crossland ACMA, CGMA | Michelle A Hanover