Events & News

Key Changes that could affect you or a family member

The Good – New Property Nil Rate Band

 

WHAT HAPPENED?

We all know that every individual on death can pass an amount of £325,000 tax free to their beneficiaries. This is referred to as the Nil Rate Band. Anything in excess of the Nil Rate Band will be charged at 40% based on the current Inheritance Tax (IHT) rule.

If you are a married couple, and on the first death the entire estate passes to the surviving spouse then there is no IHT to pay. However on the second spouse’s death the Nil Rate Bands are combined giving a Tax free threshold of £650,000. There is a percentage sliding scale applied to those estate where the first spouse did not pass everything to the surviving spouse.

The government have been kind as the new rules introduce an additional Nil Rate Band when a residence is passed on death to a direct descendant. A direct descendant will be a child (including a step-child, adopted child or foster child) of the deceased and their lineal descendants.

From 6th April 2017 this will be:

£100,000 in 2017 to 2018
£125,000 in 2018 to 2019
£150,000 in 2019 to 2020
£175,000 in 2020 to 2021

It will then increase in line with Consumer Prices Index (CPI) from 2021 to 2022 onwards. Any unused nil-rate band will be able to be transferred to a surviving spouse or civil partner.

This measure will reduce the burden of IHT for most families by making it easier to pass on the family home to direct descendants without a tax charge.

 

DOES IT AFFECT ME?

It will affect all individuals with direct descendants who have an estate (including a main residence) with total assets above the IHT threshold (or Nil Rate Band) of £325,000 and personal representatives of deceased persons.

 

HOW CAN I AVOID IT?

You won’t want to avoid this one.

 

The Ugly -The ILOTT Case

 

WHAT HAPPENED?

This case went all the way to the Supreme Court. The appeal arose out of a claim for reasonable financial provision under the Inheritance (Provision for Family and Dependants) Act (“the Act”), brought against the estate of Mrs Jackson by her daughter, Mrs Ilott. Mrs Ilott and her mother had been estranged for the majority of the 26 years preceding Mrs Jackson’s death in 2004. The estrangement began when Mrs Ilott left home at 17 to live with her now husband, with whom she has five children. Since the estrangement the daughter lived independently from her mother, albeit under straitened financial conditions. The daughter and her family received benefits, with a net annual income of around £20,000.

In Mrs Jackson’s last will of 2002, she left the majority of her estate to a number of charities, and made no provision for her daughter. This was a decision Mrs Jackson had made as early as 1984, in a Will prepared in 1984, and updated in her 2002 Will. Interestingly, the daughter had been aware of her mother’s decision within the Will and had lived without any expectation of benefit from the estate.

Nevertheless on Mrs Jackson’s death the daughter challenged the Will citing that as a daughter of the deceased she had not been gifted reasonable financial provision. In the first Court case the Judge agreed with the daughter and awarded her £50,000. The charitable beneficiaries under the will initially challenged the finding that there was any lack of reasonable provision, but that challenge failed and the dispute proceeded only on the issue of the amount of the award, which the daughter appealed as too low.

The Court of Appeal held that the original Judge had made two errors of principle in his approach:-

  1. he held the award should be limited in light of the long estrangement and lack of expectation of benefit, but did not identify what the award would have been without these factors and the reduction attributable to them.
  2. he made his award without knowing what the effect of it would be on the means-tested benefits which the daughter and her family received, some of which would be stopped if she had savings in excess of £16,000.

The Court of Appeal re-evaluated the claim, and awarded the daughter £143,000 to buy the home she lived in, and an option to receive £20,000 in one or more instalments. The award was designed to avoid affecting her benefits entitlement.

The charities appealed the decision in the Supreme Court. In March 2017 the Court reverted to the original judgment and reduced the daughter’s award of £50,000.

 

WHY DOES THIS AFFECT ME?

If you have become estranged from a family member then you need to be careful when making your Will. This case sets a precedent for estranged family members to challenge Wills under which they are excluded or not adequately provided for.

 

CAN I AVOID IT?

Solicitors are still reeling from this judgement. We are waiting to see if any further cases clarify the position. IN the meantime you can take action.

Firstly make a Will. This is the one way to avoid the Intestacy Rules kicking in; these are the rules set down in law when someone does not have a Will, whereby the government dictates how your assets are distributed rather than you making a conscious choice.

Secondly consider the extent of your estate and the dynamics of your family. Consider whether there is any scope to leave this person a small percentage of your estate. Consider also preparing a detailed side letter, placed with your Will, explaining why you are excluding this person and why you are including other people. We consider this latter point a key issue as you must be able to show why you consider those in your Will more worthy than those that you are excluding.

 

THE BAD - The Increased Probate Registry Fees

 

WHAT HAPPENED?

After a consultation process, the Government decided to proceed with the proposals to alter the current flat fee for a Grant of Probate. Currently the Court charge £215 for personal applications and £155 for solicitor applications. This fee will now be implemented on a banded structure, based on the value of the estate.

 

Value of Estate Proportion affected Proposed Fee
Up to £50,000 58% £0
Exceeds £50,000 but does not exceed £300,000 23% £300
Exceeds £300,000 but does not exceed £500,000 11% £1,000
Exceeds £500,000 but does not exceed £1m 6% £4,000
Exceeds £1m but does not exceed £1.6m 1% £8,000
Exceeds £1.6m but does  not exceed £2m 0.3% £12,000
Above £2m 0.5% £20,000

 

WHY DOES THIS AFFECT ME?

So Ok, we acknowledge that for some this is good news as the fee will not be payable at all. For those with a middling estate and perhaps on the second death of a couple the news is bad. However for some unlucky ones it is downright ugly and feels rather like a double tax as the estate will no doubt already be paying a hefty Inheritance Tax Bill charged at 40%.

It will affect all those application for a Grant of Probate made from “May 2017”. Neither the Probate Registry nor the government have been more specific. Watch this space.

 

CAN I AVOID IT?

Those in the fortunate position of being unlucky enough to pay large probate fees should already be considering ways to mitigate their estate for Inheritance Tax. This will also be helpful in reducing the Probate fee.

We can advise you on all the above issues. Contact us on 01323 720142

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