Once upon a time, marriage was for life, there was no care in the community and house prices were much, much lower. This meant that in a standard situation, Mum and Dad perhaps had a house and 2 children. One of them died, the other had the house and the children eventually inherited it. However, with us all living longer, house prices as they are and the rising divorce rate, the “multi-marrieds” are now commonplace and very often families are extended with half and step siblings. Frequently, the largest asset is the house, so dealing with it on death requires careful thought and planning.
So, some basics:
- Everyone has an amount of money they can pass on death, free of Inheritance Tax (IHT). This is called the “Nil Rate Band” (NRB).
- Since October 2007, the NRB has been £325,000 and transferable; this means that if you are a widow and have inherited everything from your late husband or wife, then you have also inherited their NRB as well.
- IHT was never intended to affect the ordinary man in the street. But, more and more frequently, it does.
This means that Will and estate planning for homeowners is now more important than ever. Let’s have a look at some examples why.
The Single Person
Wayne had never known his father and was raised by his Mother. She died when he was in his 30’s and he has no siblings. He inherited her modest estate, including her property. Wayne decides to sell the house and buy a flat, realising some surplus cash which will keep him in beer and burgers.
Why would Wayne need a Will?
First of all, the Law of Intestacy would dictate that his next of kin will inherit everything he has. This could be his father (who he doesn’t know) or, if the father has died, then any other children that he may have had. Wherever and whoever they are. But, as Wayne’s life progresses, there may be other reasons he would want to make a Will.
For instance, when he meets Chardonnay. Now he may want to make sure she is provided for. If they don’t get married, she will get nothing.
The Single Parent
There are plenty of these! So why would a single home owning parent need a Will? After all, the Law of Intestacy says that the children will get the lot in equal shares. Well, that’s ok, if you want them to get it at 18. If someone owns a house and dies with infant children, there’s a good chance that the estate could be worth several hundred thousand pounds. Would anyone want their child to have that much money at 18? A single parent can also appoint a Guardian in a Will.
The Senior Citizen – They may have no family and want to leave everything to Charity.
Someone buying their Council House – Someone buying their own council house has probably had the money provided by a third party. A Declaration of Trust will be essential here.
The Young Couple
Martin and Louise have recently bought their first home. They have a 60% mortgage and the other 40% has been provided by Louise from the sale of her flat, given to her a few years ago by her father. Louise’s father is not a huge fan of Martin and is concerned that the money he has given to her is protected in the event of his daughter dying. If nothing is done, then the property will pass to Martin by survivorship. What do we think the chances are of Louise’s father getting the family money back and how do we think he feels? He’s not only lost his daughter, the family wealth now belongs to Martin and is tied up in his property.
Martin and Louise could have done the following:
- Purchased as Tenants in Common in unequal shares
- Prepared a Declaration of Trust (DOT) setting out the beneficial interests, protecting Louise’s 40%, and
- Made Wills ensuring that they protected each other (the property will not pass by survivorship) by giving each other a life interest with the remainder to their respective families (subject to IHT planning)
Total cost of the above – Around a grand plus VAT. The money is still tied up in the property, but at least the DOT sets out the beneficial shares which means it will be protected for her family when Martin has finished with it.
The Nuclear Family
Mum, Dad and 2 kids. They want a simple arrangement, “All to each other and then to the kids”. Simple, right? Well, possibly. But simplicity has a price. If one party dies and remarries, then the whole estate could end up going to the new spouse. If the survivor has to go into permanent nursing or residential care, then the property may have to be sold to pay for that care. Half the house can be protected by buying as tenants in common and having Asset Protection Wills.
Divorces
A Will is crucial in the event of a divorce as until the Decree Absolute is granted, for succession purposes the couple are still married. That means that, if there is no Will (or a simple mirror Will is in place) then in the event of a spouse dying then it’s likely the survivor will inherit everything. Do we think that either party will want their soon to be ex-spouse to hit the financial jackpot? This could be particularly true if the marriage has broken down as a result of either party taking up with a new partner. They have to make a Will, severing the joint tenancies of any properties they own jointly at the same time.
Second Marriages
Peter and Diana are both divorced and both have children from their previous marriages. They have found love later in life (as many people do these days). They decide to marry and move in together. This is a really hard situation to advise on and there is no “One size fits all” solution. However, Wills, Declarations of Trust and general estate planning advice will be absolutely essential, otherwise there is a real chance that one set of kids is going to be incredibly disappointed…
‘Til Death Do Us Part
Not all marriages end in divorce of course, and on the majority of occasions nature will simply take its course and one of the parties will become a widow. If someone dies before their time, then the prospect of a remarriage is more likely. The older the widow, the less likely a re-marriage and more likely is a stint in a care home. Or at least, that used to be the case.
However, a widow that remarries can hit the financial jackpot, so to speak, as they already have their transferable nil rate bands “locked in”. That means that, from April 6th 2021, there can be as much as £2m passed free of Inheritance Tax on death (for instance, if two sets of widows remarry). This needs careful Will planning as a simple mirror or asset protection arrangement will completely waste one set of transferable nil rate bands and could cause an unnecessary IHT liability of £400,000.
The Residential Nil Rate Band
The Conservatives have gone some way to fulfilling their 2007 pre-election promise of raising the Nil Rate Band to £1m per person by introducing the Residential Nil Rate Band (RNRB).
In April 2017, an allowance of £100,000 per person towards their residence as an Inheritance Tax exemption was introduced. This rises by £25,000 per person every April until it reaches a maximum of £175,000 by 2021. Therefore, a married couple with a house will be able to leave up to £175k each plus the normal nil rate band of £325k to their kids. That’s a maximum of £500k each, which is £1m combined. Hurrah!
However, the house must be “closely inherited”, which effectively means by lineal descendants. Therefore children/grandchildren etc. (issue), plus step children, adopted children, children who have been put up for adoption and foster children, plus spouses, civil partners and widows who have not remarried of those groups (phew!).
There are also “Down Sizing” provisions included so that if you downsize after July 8th 2015 you still qualify for the allowance, even if you’ve converted into cash, gone to live with a relative or have sold in order to fund nursing care. This means that, if someone is downsizing, then the details of the sale must be held on record until the person dies.
Because the RNRB is transferable, this can be passed to your spouse, just like the Nil Rate Band, meaning that from April 2021, each married couple will potentially have the two £500k allowances, making the magic million subject to being eligible, meaning they have to have
- A house worth £350k or more
- Lineal descendants, and
- Less than £2m
This however is far from simple in many cases. The losers will be –
- Taxpayers with no children
- Taxpayers without their own home
- Taxpayers who have put their property into a Trust
- Taxpayers with estates over £2m
These new rules are why Widows can get a bonus! As we have heard, two widows getting remarried already have their transferable nil rate bands locked in, so with a bit of special Will planning, they could potentially get up to £1m EACH, meaning £2m tax free on death. This however has become an area of law that has reached an absurd level of complexity and which also relies on the keeping of accurate records.
What is important is that from now, every single homeowner will need estate planning advice and possibly a re-write of their Will.
For more information in relation to Wills please contact our experienced Private Client team in Leigh on Sea on 03300 585 222.
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