Wills and Tax planning

I don’t like to think about making a Will

Making a Will does not bring forward the date of your death.  It is simply a way of putting your affairs in order so that, when the time comes, your family can sort things out as you wish.

I haven’t anything to leave

You don’t have to be wealthy to make a Will.  If you own your house and have a small amount of savings, you can easily be worth £325,000 or more.

My wife or husband will get everything anyway

Not necessarily. If you die without making a Will (which lawyers call ‘dying intestate’) then your wife may have to share your estate with your children or other relatives.

If we both die, the children will be taken care of.

Yes – but who will be taking care of them if you both die while they are under 18?  If you have close relatives then any one of them can apply to the court to be appointed guardian.  If you have no close relatives, then your children could be taken into care by the local authority.  By making a Will you can choose a guardian for your children.

Everyone in the family knows who gets what.

Well, you may think they do. Many long running family feuds have started with a row about something in a relatives estate. Is that the sort of bequest you want to leave your family?

I don’t need to worry about Inheritance Tax

Nowadays you do need to worry about tax, even with a quite modest estate.  Your house is an extremely valuable asset and can easily put you into the tax bracket.  Often there are simple ways of reducing the amount of tax your family has to pay, but you can only take advantage of them by making a Will now.

Yes. A Will is a legal document, and lawyers have the necessary training to make sure that your Will does what you want. There are often very considerable tax advantages in drafting the Will one way rather than another. We have considerable experience in drafting Wills and in tax law which will enable us to tailor your Will to your exact requirements. Remember that Solicitors can make more money from sorting out the muddle caused by a home made Will than from administering a professionally drafted Will.

If you don’t make a Will, the law has to decide who will inherit your estate.  In brief, what happens is as follows:

• If you leave a spouse and children, then your spouse gets the household contents and the first £250,000 of your property.  The balance is shared with the children.  Jointly owned property is excluded from the calculations.
• If you leave a spouse but no children then your spouse will get the first £450,000 of your property.  Any balance over that will be shared with your parents if they are still alive or with your brothers and sisters.
• If your spouse has died before you, or if you were not married, and you leave children, your children will get everything.
• If you are unmarried without children, your property goes to your parents if they survive you, or to your brothers and sisters or to other relatives who are descendants of your grandparents.
• “Spouse” includes a Civil Partner
• If you are living with somebody but are not legally married to or in a civil partnership with that person, your partner has no legal right to any of your estate if you have not made a Will.  There is no such thing a ‘common-law’ wife or husband.  If there are no children your partner will get nothing and  your estate will be passed on the relatives mentioned in the previous paragraph.

Executors

Your Executors are the people who administer your estate and carry out the instructions in your Will.  It is important to choose someone who will be able to deal with your estate in a businesslike way.

Members of your family will often be able to undertake the task, but you may feel that you would like them to have some professional help.  Have you thought about the advantages of appointing your solicitors as your Executors?  We at Ferguson Bricknell have been administering estates for many years, and our experience is available to ensure that your affairs are wound up as smoothly and expeditiously as possible.  We always liaise closely with your family or other beneficiaries.

 

Guardians

When both parents of children under eighteen die a guardian must be appointed.  The guardian stands in the position of the child’s parents and assumes all the parents’ legal duties and rights in respect of the child.  The guardian becomes responsible for seeing that the child is housed, fed and clothed, that the child is educated and receives medical treatment when necessary.  The guardian is responsible for day to day care and control of the child.

In most cases the child will live with the guardian who will provide a new family for the child.  We recommend that your guardians should be of a similar age to yourselves and have similar views on bringing up children.  It is most important that you discuss matters with your proposed guardians before you include their names in your Will.  This is a very important job and the proposed guardians should think carefully before agreeing to act.  Usually a relative is asked to act as guardian but there is no reason why you should not ask a close friend.  We suggest that you appoint a married couple, and you may wish to consider reserve guardians just in case your first choice are unable to act.

If the parents are not married, only the mother can appoint a guardian by Will unless the father has obtained parental responsibility under the Children Act 1989. He can do this either by agreement with the mother or by court order. If you are in any doubt about your position we can advise you.

 

Legacies

You may wish to leave a sum of money to someone.  This is called a legacy.  Bear in mind that what seems like a generous sum now may be worth little in ten or twenty years time.  If you include legacies in your Will it is sensible to review your Will every five years or so.

 

Special bequests

You may wish to leave specific things (e.g. a picture or a piece of jewellery) to a particular person.  This is called a specific bequest.  It is important to describe the object clearly so that there is no dispute about which item you meant

 

Residue

Everything you own which you have not given away as a legacy or as a specific bequest is the residue of your estate.  Usually any debts outstanding at the date of your death, your funeral expenses and any inheritance tax due on your estate are paid out of residue.  You must decide who is to get what is left.  You can divide it among as many people as you wish, and in whatever proportions you choose; there is no need for it to be shared equally.

 

Provisions for young children

If you die leaving children under eighteen you must ensure that they are properly provided for in your Will.  You cannot expect your guardians to pay for your children out of their own pockets, although it is only fair to warn your guardians that they may have to put their hands in their pockets at some stage, particularly if your children are very young and your only asset is a house of average value.  It is for this reason that it is usually better to appoint a relative, since your family will feel they have a moral obligation to your children even if the money runs out.

The guardians will be entitled to claim child benefit for your children, but that falls far short of the cost of bringing up children, as you will be aware.  You must therefore make sure that your estate is made available for the benefit of your children.

The first and obvious point to make is that you cannot hand over a share of your estate to your young children.  Apart from the fact that they would be unable to handle the money properly, the law does not allow them to have large sums of money or property until they reach eighteen.  Your estate therefore has to be looked after by trustees who hold the money in trust for the children until they reach eighteen or any older age which you specify.  This does not mean that your money is locked away until the children reach eighteen.  The trustees have power to invest your money (after taking professional advice) and to use the income and capital for the upbringing of your children.

This means that the guardians can receive a regular income from the trust fund.  If your children are very young it is possible that all the money in the trust fund will have been used up by the time they reach eighteen, but remember that the object is to provide for your children’s upbringing, not to provide a large nest-egg for them.

How is your money to be divided among your children?  Most people think it should be divided equally, but in fact this does not always produce the fairest result.  Suppose you have three children aged 13, 9 and 5.  The youngest will be dependent on your guardians for eight years longer than the oldest.  If your estate is divided equally the oldest will possibly inherit a substantial sum of money at 18 while the youngest runs out of money at about 14 leaving your guardians in financial difficulties.  The solution which we recommend is to create a discretionary trust in your Will.

Your trustees are instructed to use your money for the benefit of your children, but it is left to your trustees to decide how much is spent on each child.  They do not have to make sure that each child receives exactly the same amount.  In the example given above, when the eldest child leaves home the trustees can divert money to the other two.

But, you may say, how can this be fair?  The youngest child will have received much more money than the oldest.

If you only look at the period after your death that is correct.  But remember, in the above example, that the oldest child has had the benefit of your money during your lifetime for eight years before the youngest was born.  If you look at the childhood years of each child, both before and after your death, each child will have received roughly the same amount from you, adjusted for inflation.

When should the children be entitled to receive any remaining capital?  For legal reasons 18 is the youngest age you can stipulate, and for tax reasons 25 is the oldest.  Many people think that eighteen is too young to receive a large sum of money and prefer the traditional age of twenty-one.  Whatever the age you specify, under a discretionary trust the trustees can always release capital to your children before they reach that age, for example to put down a deposit on a house.

Finally, who should be your trustees?  Your Executors become the first trustees and they can appoint additional or replacement trustees.  We do not advise that the guardians are the sole trustees; it places too heavy a burden of responsibility on them and can make them vulnerable to accusations from your children that they have used your money wrongly.  At least one independent trustee can give your guardians peace of mind.  Ferguson Bricknell & Co have many years experience in administering trusts and that experience can be made available for the benefit of your children by appointing us as one of your Executors and trustees.

 

What if all the family die at the same time?

Especially while your children are young and living with you, you should not ignore the possibility of you and all your children being killed in the same accident.  Sadly, road accidents are all too common.  If this tragedy did occur it is important to stipulate who is to get your estate – it might be other relatives or you might leave it to charity.

 

Charities

It is always worth considering leaving part of your estate to charity; there are many worthwhile causes to support and as a bonus all gifts to charity are exempt from Inheritance Tax.  The partners of Ferguson Bricknell actively support a number of charities and we have information to assist you in choosing a charity.

 

Administrative provisions

It is usual to include a number of administrative clauses in a Will, particularly if a trust for young children is likely to arise.  These enable the executors to administer the trust fund more efficiently.  We will advise you on these when you instruct us to draft your Will.

 

Funeral arrangements

You can include funeral directions in your Will.  Please bear in mind that funeral directions are not legally binding and it is sensible to make sure that someone in the family knows your wishes; often the Will is not looked at until after the funeral arrangements have been made.

If you need residential care later in life, you will have to pay the cost from your own money if you have a house and savings worth more than £23,250, This can mean that you will not be able to leave as much money as you had hoped to your children.

If you are a couple who own your home jointly, you can set up your Wills so that at least half the value of your house is preserved for the benefit of your children even if one of you needs care and in many cases nearly all the value of your house can be preserved.

Individual circumstances differ and you need to talk to us to find out whether a Care Home Fees Protection Will can work for you. This can only be set up for couples while both spouses or partners are still alive; we regret that it does not work if you are single, divorced or widowed.

For further information and advice please contact our City Centre office.

If you are worth more than £325,000 when you die your family may have to pay Inheritance Tax on your estate. Most homeowners in Oxfordshire have an Inheritance Tax problem because of the value of their houses.

No Inheritance Tax is payable on anything you leave to your husband or wife, civil partner or to charity. Money or property left to anybody else, including your children or a partner to whom you are not married or in a civil partnership, is taxed at 40% on the value over £325,000.

Trusts

Some newspaper columns give the impression that all you need to do save inheritance tax is to set up a trust. A trust is a very useful tool for tax planning but, by itself, does not save any tax. It has to be used as part of an overall tax saving scheme.

Double exemption for married couples and civil partners

Married couples can double-up the tax free amount which they can leave to their family. If the first spouse or civil partner has died leaving all his or her estate to the other, then when the survivor dies  the family get the benefit of a double nil-rate band. At 2016/17 rates, this means that on the second death £650,000 will be exempt from tax. And it does not matter if first spouse died before October 2007, the relief can still be doubled up.

Residence Nil Rate Band

In addition to the general nil-rate band, your estate may also benefit from a new relief called the residence nil-rate band. To qualify for this relief you must leave your home to your children or grandchildren. It comes into effect in tax year 2017-18 when it is worth £100,000 and it then rises by £25,000 in each of the next three tax years, reaching £175,000 in 2020-21. The relief is transferrable between spouses in the same way as the nil-rate band. If you home (or your share in it) is worth less than the residence nil-rate amount, then the relief is limited to the actual value of your home.

The combined effect of the transferrable nil-rate band and the residence nil-rate band is that no inheritance tax will be payable on your estate until the net estate is worth more than £1 million.

If you don’t have children or grandchildren, then the residence nil-rate band is not available to you.

Exemptions and Lifetime Gifts

You can give away £3,000 in any tax year (6th April – 5th April) without incurring any Inheritance Tax liability. If you did not use your annual exemption in the previous tax year, you can carry it forward for one year only. Husband and wife (and civil partners) have an annual exemption each.

You can give £5,000 free of Inheritance Tax as a wedding present to each of your children when they get married (or enter into a civil partnership).

If you give away money or property worth more than the annual exemption, the value of that gift will drop out of your estate for Inheritance Tax purposes if you live seven years from the date of the gift. If you die within seven years, the value of the gift has to be added back to your estate and is taxed.

Advice

For advice on how you can reduce your inheritance tax bill, please contact our City Centre office.

Since December 2005 it has been possible for same-sex couples to enter into a civil partnership which gives them legal and tax rights and obligations that are virtually the same as for a married couple.

It is important that you review your Wills and inheritance tax planning arrangements if you are thinking of entering a civil partnership. Please note that any Will you already have will be revoked automatically when you sign the Civil Partnership Register, unless the Will includes a clause stating that it is not to be revoked in such circumstances.

For advice on making Wills and inheritance tax planning for civil partners please contact our City Centre office.

You are now the proud owner of a holiday home in France. You have bought it for the family to use and you would like to pass it on to your children, once both of you have died. You have made Wills in England leaving everything to each other and then on to the children, so you’re covered, aren’t you?

No. You have a problem.

Land and houses in France are subject to French law and you cannot override the French inheritance rules in an English Will. Any bank accounts or other money you have in France can be dealt with under your English Will, as can the furniture and household contents in your French home. But in most countries, the inheritance of land and houses is subject to the law of the country concerned. In France this means that your house is subject to the forced heirship rules, and certain members of your family are entitled to part of your estate regardless of what you have said in your Will. The forced heirship rules apply even if you don’t want to leave anything to a particular relative. You will probably be surprised to learn that the list of relatives who are entitled to a share of your house does not include your husband or wife.

If you have children they are entitled to a share of your interest in the house. One child gets half your share. Two children get one third each. Three or more children share three-quarters between them. Children include children from any previous marriage and any born outside marriage  even an accident from your youth. You can only leave the remaining one-half, one-third or one-quarter (as the case may be) to your spouse.

You also need to bear in mind that French inheritance tax is payable. In France it is a true inheritance tax which is charged on the people who inherit a share of your estate. The amount of tax depends on how closely related the beneficiary and the deceased are, and there is no spouse exemption.

There are steps you can take to protect your spouse’s position after your death, but you should take advice before you complete your purchase. For further information and advice please contact our City Centre office.