Intestacy and unexpected Inheritance tax bills

Many people will have been saddened by the premature and sudden death last year of the comedian, Rik Mayall, and will have also read that Rik died without making a Will which has led to his estate reportedly facing an 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 £250,000, 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 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 in the Budget  this useful tool was earmarked for review and should not be relied on for the future.

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Further Reading

• Factsheet: The family home
• Factsheet: Gifting the family home – the risks and benefits
• Flowchart: Which Wills do we need?
• Wealth, Health and Inheritance Briefing – view the latest edition and sign up for regular updates
• Family Wealth blog – for news and articles

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