What a difference a day makes

You may be used to your professional advisers regularly reminding you of the importance of having an up to date Will in place, obviously in particular to ensure that your assets are passed onto those who you wish to benefit from them. However how often do you consider whether your Will is still effective for tax purposes?

It is often a change in family circumstances that results in a new Will being drawn up, such as the birth of a child or grandchildren. It is also important however to remember changes to the assets you hold, any reliefs available against their value and changes to the tax legislation. This in turn obviously impacts on your Inheritance Tax liability, and consideration is also needed as to who will bear that liability, which will typically be your residuary beneficiaries. A change in circumstances which has not been considered in detail could potentially lead to some significant issues, as illustrated by a few simple examples below.

Mr Jones and the sale of his business

Mr Jones is widowed, owns a house, has some savings and a share portfolio and runs a family business in the form of a company. He has had a Will in place for a number of years leaving the house, his savings and the share portfolio to his son and the business to his daughter who is an employee of it. On Mr Jones’ death, the value of the business will be covered by business property relief, so the daughter will inherit it free from an Inheritance Tax liability.  Some Inheritance Tax will be payable on the assets passing to the son, however after taking account of the amount due, the son and daughter inherit roughly the same amount.

Mr Jones receives an offer of £1 million out of the blue for the business, which is too good to refuse. The sale is rushed through to meet the buyer’s deadline, and the proceeds go into Mr Jones’ savings account. Due to the time pressures, he has completely forgotten to consider his Will in advance of the sale taking place. Not only does the business that is referred to in his Will as passing to his daughter no longer exist, the exposure to Inheritance Tax on his estate has significantly changed overnight. He was holding shares in his company, the value of which was covered by business property relief, but he is now holding cash which is chargeable to Inheritance Tax. This could increase the exposure to Inheritance Tax by £400,000 (£1 million at 40%).

Obviously, there should have been some advance thought as to how his assets were to be left to his children post the sale of the business, but this is just as important as the sudden increase in exposure to Inheritance Tax. He could for example have considered investing the proceeds in shares that qualify for business property relief to reduce this exposure or started making some lifetime gifts.

Mrs Smith and her inheritance

Mrs Smith’s estate, which includes her home, is valued at approximately £1.9 million. On her death, her Executors will be able to claim the standard Inheritance Tax nil rate band of £325,000. In addition, as her estate is worth less than £2 million, they will also be able to claim the residential nil rate band of £175,000 as the house is being left to her children.

Out of the blue, Mrs Smith receives an unexpected inheritance of £1 million from a distant aunt, which she leaves in her savings account and does not think about doing anything proactive with. This will obviously increase the value of her estate to approximately £2.9 million. As a result, Mrs Smith’s Executors would no longer be able to claim the residential nil rate band as the value now exceeds the £2 million threshold. So, the Inheritance Tax liability on her estate will increase by £400,0000 on the £1 million investment, and a further £70,000 because of the loss of the residential nil rate band. Depending upon how she has structured her Will in terms of what assets have been left to each of her children and whether they have been left free of Inheritance Tax, there could suddenly be an unexpected disparity between the value each of her children inherit.

Diversification activities

Many businesses, particularly in farming, are diversifying, and it may be that those diversified activities have an impact on a future claim for agricultural and/or business property relief for Inheritance tax purposes. It is therefore important to regularly review what reliefs are available, especially when legislation changes. It may be that arrangements can be put in place to ensure that a newly started diversified activity does not taint the reliefs available on the existing activities.

These are of course just a few examples of simple changes that can have a significant impact on the exposure to Inheritance Tax on an estate.

If you would like to discuss any of the topics explored above, please contact Jamie.