T72 - New Rules, Old Dilemmas

For the first time in over 15 years, the rules relating to people dying intestate (without a valid will) changed from the 1st February 2009. This may be good news for some spouses but should equally be a reminder that your will should be in up to date to ensure that your estate is dealt with as you wish and not in accordance with the law (which doesn’t care what you want).

The following is a brief summary with examples, but this is a very complex area, so it is essential to get proper advice.

The main change is that if a spouse or civil partner dies without a will and there are no children of the relationship, the surviving spouse/civil partner will be entitled to the first £450,000.00 of the estate as against the current £200,000.00 - a substantial increase.

In the event that there are any children surviving the deceased, the surviving spouse/civil partner of the intestate will be entitled to the first £250,000 of the estate together with a life interest in the resulting statutory trust of one-half of the remainder of the estate.

Whilst the new rules may be very welcome for surviving spouses of long marriages whose spouses failed to make a Will. Let’s look at an example:

Consider the case of Herbert - an elderly widower with an estate of £250,000. He re-married a year or so before his death without making a new will. As a result, the new wife (a 20-something. Cynical – me?!) may get the whole of the estate whilst the children of the deceased may be left with nothing or very little. Poor old Herbert or more to the point - Herbert’s poor children! (Remember that divorcing/remarrying makes your existing will void!)

In 2007 of course, new rules were announced which meant that married couples or civil partners could make use of each other’s IHT free allowance without special tax planning.

In practice, that means that any part of the tax-free allowance available to every individual, that was not used when the first partner died can be transferred to the surviving partner for use on their death. If no part of the first spouse’s nil rate band was used on their death, the surviving partner will have double the nil rate band (the nil rate value will be the one in force at the time of the second death – not the first death).

Before these rules came in, what many people did was to make a "smart" will that used the nil rate band by creating an "I owe You" on the estate resulting in reducing total IHT by this I.O.U at 40%. Now, however, this is not needed and in some cases can even put you at a disadvantage, as by using the nil rate band in force at the time of the first death, you will lose out on the increase between the nil rate band at the first death and the nil rate band at the second death (it generally increases every year.)

If you are worried about inheritance tax, speak to your advisor (who should ideally be a certified financial planner) and talk things through. With some planning, it is possible to mitigate IHT liabilities. There are a number of different solutions available and a suitable expert can help match a solution to you circumstances.

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This web-site was last updated on 19/07/2010

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