The perils of dying intestate

Tristan Noyes looks at the impact of dying without a valid will and how that affects an individual’s inheritance tax position. Some find it morbid to think about planning for their own death, so put off writing a will.

The importance of a will

There are myriad reasons to avoid the task, but many good reasons to stop putting it off:
• Without a valid will, your estate passes under detailed and fixed statutory rules. These rules allocate assets and value to your spouse or civil partner, children, parents and other relatives (depending on the circumstances and amounts involved).

• Crucially, the statutory rules in England and Wales do not recognise unmarried couples (even if cohabiting for many years – there is no concept of ‘common law’ spouses). Cohabiting
partners have greater rights in Scotland, but no automatic right.

• This could be very upsetting for unmarried couples, particularly if the deceased never formally divorced from a previous spouse – the estranged spouse could inherit everything!

• Similarly, only blood relatives inherit assets, which may cause surprises or friction for ‘blended’ families. It also precludes benefiting friends or carers that you might want to benefit but are not relatives.

Focus on the tax

As well as the economic impact of dying without a will (i.e., intestacy) and the emotional impact this could have on a grieving family, none of the planning opportunities of having a tax-efficient will are available. This includes:

• Spouse exemption: typically, married couples would leave everything to each other, utilising the exemption from IHT on legacies to spouses. The intestacy rules can limit the amount a spouse inherits, meaning IHT could be payable unnecessarily on the first death.

• Double dip: for assets that qualify for IHT exemptions, such as business property relief (BPR) or agricultural property relief (APR), a common strategy is to leave these qualifying assets to children. Once the children have inherited (potentially IHT-free), the surviving spouse buys the assets for cash, resulting in tax-free cash for the children, and a second claim to BPR or APR on the surviving spouse’s death. This technique is not available in intestacy.

• Generation skipping: wills can be structured to pass assets to grandchildren or other family members, often using trusts drafted into the will. With no will, this opportunity is lost, and assets could increase the estates of beneficiaries with existing assets, compounding their potential IHT risk.

• Deeds of variation: it is possible to vary a will after the death of the testator, to change who benefits or to direct assets to trusts or the next generation. It’s not possible to vary a will if there is no will!

• Charitable legacies: the intestacy rules make no provision for passing assets to charity, missing the opportunity for IHT-free gifts. Even for modest estates, a straightforward will can unlock tax benefits and give flexibility.

I wrote a will – All sorted?

Never writing a will obviously results in an intestate estate, but several other situations can result in intestacy:

• wills are automatically revoked on marriage (unless the will specifically contemplates the marriage). If you’ve got married since you made your will, you may find it is no longer valid.

• Drafting and execution of wills is formalistic and prescribed. If the will is not correctly drafted or not correctly signed and witnessed, this could lead to the will being declared invalid, leaving you intestate. This is a particular risk with homemade or DIY wills.

• Losing, accidentally destroying or revoking your will leaves you with no valid will and an intestate estate.

Practical tip

Dying intestate is often the least tax-efficient way of passing on assets, as well as leading to unintended outcomes which don’t meet your wishes or objectives. If you’ve not got one, putting in place a quick, simple, and correctly executed will can save a host of problems for your beneficiaries.

Disclaimer: The information provided on AccountingFirms.co.uk is for informational purposes only and should not be considered as financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.