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“I always told him he needed a good lawyer”

Television drama has been a necessary diversion during these endless winter weeks of lockdown but a series currently showing on Sunday evenings has provided a useful case study in what not to do if you wish to ensure your family is taken care of following your sudden death.

“Finding Alice” starts with Alice and her partner Harry moving into a new house which is Smart in every way. On moving day Harry suffers a fatal fall down the bannister-less stairs. Alice is understandably devastated but the situation gets worse as various secrets are revealed.

No Will

Harry had not made a Will. This could be disastrous for Alice as she and Harry were not married; Harry’s death intestate means that she will inherit nothing as of right except assets they might have owned in joint names. The couple’s daughter, Charlotte is entitled to her father’s estate under the intestacy rules but she has to share it with Harry’s son George who appears out of nowhere after his father’s death. Any assets they do receive are potentially liable to inheritance tax.

A deed of variation within two years of Harry’s death could, if George and Charlotte agree, re-direct their entitlement to Alice, but Charlotte is under the age of 18. If so she cannot consent to a variation until she reaches 18, unless the court is prepared to consent on her behalf. (The series ignores Charlotte’s lack of legal capacity.)

Inheritance tax would still be payable even if the estate is re-directed to Alice because Alice and Harry were not married. It might therefore be advisable to put some of the assets into trust for Alice and the children. This would not reduce the tax due immediately but could help to reduce the tax bill when Alice eventually dies as the assets in trust would not be part of her estate.

Harry’s smart house

Alice obviously expects to inherit the brand new house (perhaps she thinks it is owned jointly) but, in order to try to put his assets out of the reach of his many creditors, Harry gave the house to his parents just before his death. This is a transfer for inheritance tax purposes and the house clearly exceeds the value of the nil rate band which can be given away without a tax bill (£325,000 currently). Harry’s poor parents as the recipients of the gift face a large IHT liability. It seems that Harry did not take any advice before making the gift because a reducing term insurance policy held in trust for his parents could have provided them with the money to pay the tax bill if Harry died within seven years of the gift. He could also have protected his parents by making a Will including a provision that his estate should pay the tax on any failed gift and the bill should not fall on his parents. Instead Harry’s parents are trying to sell the property (in the grounds of which Harry is buried) to raise funds to pay the tax.

Harry’s parents intend to give the balance of the sale proceeds after paying off the tax to Alice. They should consider their own inheritance tax position on this gift, especially as they are not young and have a daughter who may not be happy to find that her parents’ nil rate bands had all been used in a gift to Alice.

The debts

Harry has also left behind a raft of debts, many connected with his building company. Before anyone starts to administer his estate it will be essential to establish whether or not it is insolvent, particularly as in those circumstances statute lays down the order in which creditors should be paid. The gift of the house to Harry’s parents might also be at risk of being set aside, if it can be shown that he intended to defraud his creditors, which could result in a court order making the house proceeds available to pay off his debts.

Alice will not be liable for any of Harry’s debts and nor would she be if they were married. If the business is a limited liability company, and it has incurred debts it cannot pay, Harry’s estate will not be liable for these in his capacity as a shareholder unless he had given a personal guarantee.

Advice to Alice

Alice seems to rely on ad-hoc advice from her father who is a retired (in her words) “sort of solicitor” but her situation is a complicated one and she should take heed of the advice she used to give Harry – “I always told him he needed a good lawyer but he preferred to buy sand instead.”

Written by Jackie Moor

Posted:

Your key contact

Carol Cummins

Consultant

Bristol
Carol enjoys long term relationships with her clients and likes to get to know the families well so that she can help them at each key step in life with a focus on protecting the family wealth from erosion by tax and outside claims so it remains in the family for future generations.
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