Posted by Chris Wilson, Partner
The unforeseen consequences of not making a will
Although making a Will may seem obvious, it is still something that the majority of people do not have. It is one of the best tax planning and wealth protection vehicles available.
It is estimated that less than 50% of the adult population in the UK have a Will. Many reasons are given as to why so many people don’t have one:
- No assets to leave
- An assumption that a particular person will inherit the estate
- Simple lethargy
There can however, be significant consequences where a Will is not made. When someone dies without a Will, their assets move by the “intestacy rules”. These rules set out which family members get what assets. This can lead to assets not moving to whom they would have otherwise been intended, substantial delays in administering the estate and potentially a missed opportunity to save tax.
Highlighted below is an example from a recent case.
Mr Smith died with an estate of approximately £9 million. The main assets were Mr Smith’s property and his interest in the family business. He was survived by his wife Mrs Smith and their two children aged one and three.
The family had assumed that the estate would pass to Mrs Smith. However, under the intestacy rules, this was not the case. Instead, Mrs Smith received:
- All of the deceased’s personal belongings
- The first £270,000 of the estate
- Half of the remaining estate.
The balance of the estate moved to Mr Smith’s children. This left approximately £4.3 million moving to the deceased’s children. This had several negative effects:
- Substantial monies moved to the children. This left the spouse without sufficient assets to retain the house or to generate an income for her.
- Because the estate did not move entirely to the spouse, an inheritance tax charge of around £1.6 million was levied on the estate. This would not have arisen if the estate had been left entirely to Mrs Smith.
- Under the intestacy rules, the children inherit at 18. This means the children will receive substantial monies when they may lack the required financial maturity to deal with the assets appropriately. These could easily end up being wasted.
Had the children been over 18 they could have entered into a Deed of Variation to pass their inheritance back to their mother. This would have prevented the tax charge and allowed the Mrs Smith to potentially pass monies to her children in the future in a more tax efficient manner and at a more appropriate time. However, because the children were under 18, they were not able to enter into such arrangement.
Instead, in order to mitigate the tax and prevent the children from inheriting vast sums at such a young age, it was necessary to apply to the Court for an order to vary the terms of the intestacy. This substantially delayed matters and greatly increased the costs payable to administer the estate. If the Court application had failed, it would have left a tax liability of such scale it would have required a sale of the family home or the family business.
All of this could have been avoided by the person ensuring they had a tax efficient Will.
If you need to discuss creating a will, please contact Chris Wilson
01865 268 643 Email us