Intestacy and unexpected Inheritance tax bills

Over the years many celebrities have died without making a Will including Jimi Hendrix and Prince. The comedian, Rik Mayall, sadly died in 2016 without a Will leading to his estate reportedly facing a large inheritance tax (IHT) bill.

Assets left to a surviving spouse or registered civil partner are free from IHT, but under the intestacy rules, which apply when someone dies without a Will, not all of the estate will necessarily pass to the surviving spouse. Take the example of someone with an estate of £1.5 million in their sole name who has a spouse and two children under the age of eighteen. Under the intestacy rules the surviving spouse would receive £270,000, the personal effects and half of the remainder. The other half of the remainder (£625,000 assuming no personal effects) would be divided between the children and held in trust until they reach eighteen.

In this example the amount passing to the children exceeds the current nil rate band allowance of £325,000, so (if the residential nil rate band was not available) there would be an IHT bill to pay of £120,000. This bill could have been deferred until both spouses had died if a Will had been made leaving everything to the surviving spouse. In addition, the intestacy uses up the first spouse’s nil rate band meaning that there is no unused nil rate band to transfer to the surviving spouse, potentially increasing the IHT on the second death.

For example, if the entire £1.5 million is left to the surviving spouse who dies in 2025 when the IHT nil rate band is £500,000, the surviving spouse’s executors would be able to claim the first spouse’s unused nil rate band. This would mean £1 million would be free of IHT leaving £500,000 taxable at 40% and a tax bill of £200,000 in total on both deaths. By dying intestate with a £1.5 million estate, £120,000 IHT is payable on the first death and £150,000 on the second death, a total IHT bill of £270,000.

It is currently possible for the intestacy rules to be varied within two years of a death and a tax efficient notional Will put in place. This requires everyone who benefits under the intestacy to agree to the variation and for the Court to consent on behalf of beneficiaries under the age of eighteen. Repairing the damage done by not making a Will is one of the advantages of Deeds of Variation but it should be remembered that over the years the continued existence of this useful tool has been in jeopardy and it is not wise to rely on it  for the future.

Contact an inheritance tax specialist

For IHT advice, call 0800 652 8025 or contact us online. Your initial consultation is free. Our specialist solicitors are based in Birmingham, Bristol, Cardiff, London, Manchester, Southampton and Taunton.