Assets that commonly pass outside a Will & IHT benefits

September 3, 2017

Whereas generally a Will can dispose of property that the deceased owned at his death, a testator (the person making a Will) doesn’t need to dispose of all his property in this way. Care should be taken in drafting the Will as failure to dispose of any part of an estate means that part will be distributed under the laws of intestacy (ie where there is no Will – the testator will be said to die partially intestate)

 

At death, the deceased’s estate is known as his free estate, meaning that which he is free to dispose of. Some assets commonly do not form part of the free estate, and could have significant inheritance tax (IHT) implications when dealt with in the right way.

  • Trust property – enjoyed by the deceased in their lifetime, for example where he or she was a life tenant, will not form part of their estate; where the property is settled by another, or a reduced amount in the case of a lifetime transfer if the property settled was that of the life tenant. The devolution of the property is controlled by the trust deed itself rather than the Will of the life tenant. Such vehicles typically are used in cases of second marriages where the first to die wants to ensure the surviving spouse remains in the property for the remainder of their lifetime, but wants the property itself to pass to children from a previous marriage or relationship.

  • Life Policies – Where these are payable to the policyholder they form part of the estate and swell it by the policy value. Consider an estate value equal to the nil rate band, £325,000 in the current tax year, meaning no IHT payable. Now add in a life policy for just £100,000 and suddenly that £100,000 is subject to 40% IHT. Ouch. Naming a beneficiary, ie a child or surviving spouse, takes the policy proceeds out of the estate thus escaping a charge to IHT.

  • Interests in beneficial joint tenancy property – do not form part of the deceased’s estate, passing by survivorship to the co-owners, and in the case of married or cohabiting couples, benefit from IHT interspousal exemption. Conversely, tenancy in common interests do form part of the estate and provide opportunities to create tax efficient vehicles such as life interest trusts referred to above. Created through a Will offers significant tax benefits, see my article Protect the ones you love with a life interest trust

  • Pension benefits – are typically subject to a trust in the pension trust deed in favour of the deceased, and on death in favour the deceased’s dependants. Structured in this way gives substantial IHT advantages, ensuring payments pass outside the Will.

Other examples include foreign or nominated property, but for this article the above examples are a demonstration that most people can take advantage of significant IHT benefits with the right advice.

 

This information provided in this article is not intended to constitute legal advice and each relationship breakdown requires careful consideration in our view by a fully qualified Solicitor before decisions are made and before you embark on a certain course of action.

 

Nino Cuffaro

Penn Chambers Solicitors
0207 183 1485

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