Getting your inheritance tax planning and will sorted can be a bit of a touchy, morbid subject for many but if there’s one thing the pandemic has taught us it is not to rest on your laurels. By securing your estate and assets, you will be safe in the knowledge that should the worst were to happen then your loved ones are protected and your legacy will be appropriately passed on.
We spoke to Nordens Tax Manager, Adam Truluck, as well as Taylors Legal Solicitor’s Director, Nicola Daniel, about IHT and wills, the rise in applications during the pandemic, as well as potential changes moving forward…
It can be quite a daunting prospect, but just how important is sorting out your Inheritance Tax as well as your will?
ND: Sorting your will is crucial if you want your assets passed on to those who you wish to inherit them. Without a will, the rules of intestacy apply meaning the law decides who inherits your assets and this may not be who you want. Additionally, if you don’t want someone specific to inherit your assets then this can only be achieved through a valid and legally binding will. As well as this, a will can also be used to reduce your inheritance tax liability through appropriate tax planning measures and making use of the spousal exemption. Many people believe that if a will isn’t in place, then their spouse or civil partner will automatically inherit their estate. This just isn’t the case under the rules of intestacy, as a spouse or civil partner will inherit a statutory legacy of £270,000 plus half of their balance, with any children inheriting the other half. So, if you want a set amount or everything left to your spouse or civil partner then it’s important to include this in your will.
AT: From the IHT side, it’s incredibly important to get your affairs in order. If you don’t, then you could end up with a huge IHT bill for your relatives to pay which may require them to sell off parts of your estate just to be able to pay it. With the massive rise of housing prices, many people nowadays will find that their home already exceeds the IHT allowance (£325,000) and then on top of that you have bank balances, buy to let properties and other assets for which anything exceeding the allowance is taxed at 40%. It can add up seriously quickly if nothing has been sorted. Following on from what Nicola was saying, it’s so vital that any inheritance tax planning done is matched and followed by your will. If your will states otherwise, then it could lead to huge problems and many complications arising so it’s highly recommended that both are done together.
Since lockdown began, have more people enquired about Inheritance Tax?
AT: Yes, most definitely, by probably around three-fold the normal amount we’re used to. Especially with COVID, a lot of people have realised that the worst can happen pretty much out of the blue. This is why a large majority of people who were looking to sort their IHT in the not-too-distant future have prioritised it and are looking to get it sorted quickly. If no plans are in place, then your estate is in deep trouble and it will take a lot of hard work to rectify and in most occasions this isn’t even possible.
When should a person start considering writing a will and how do they go about this?
ND: If you own property, have children under the age of 18, or you’re living with a partner but aren’t married or in a legal civil partnership then you really need to consider making a will without delay. These are the key circumstances where things can go wrong and a huge negative effect on your estate can happen. Truthfully, we always recommend for anyone with any assets whatsoever to make a will because the rules of intestacy may not be what you exactly want. A common mistake is that people think because they don’t own property, they won’t necessarily need a will but if you have a substantial amount of money in the bank, you need to think about who I want that to go to once I pass. There are also things that fall outside of assets, such as legal guardianship of children, which really needs careful consideration.
Have HMRC released enough educational material and resources to inform people about IHT and its complexities?
AT: Simply put, not in the slightest. IHT is an absolute minefield with so many pitfalls and complexities that you can fall into and it’s one of those things where if you don’t do it right then everything is pointless and will require a full resubmission. One of the most common catches, is people looking to put their assets within a trust, however you need to pay 20% of the value of the assets just to do this. They then realise that they’ll need to pay that hefty tax bill immediately which just isn’t feasibly possible for many people. There really isn’t a lot of educational material or resources put out by HMRC to teach people about IHT, evidenced by the fact that many young people have never even heard of it. Coincidentally, if you look at capital gains tax (CGT), there’s an abundance of resources and materials online from HMRC, possibly because CGT brings in a large amount for the revenue each year. This is why it’s vital to seek professional and well-versed advice when it comes to IHT, as it could prove so valuable in the long term.
Do you see changes to IHT and wills moving forward, whether that be as a measure to improve the economic recovery faster or help to modernise, and how could this come about?
AT: I’d personally love to see changes going forward for IHT. The allowance rate are unrealistic when based against the average house price nowadays. There are two ways that change can come about; one is raising the allowance threshold, and two is lowering the rate at which tax is paid. Realistically, I can’t see HMRC lowering the rate so hopefully the allowance rate will be raised in conjunction with inflation and rising prices presently. That being said, I can’t feasibly see HMRC doing that this tax year though, especially with everything that has been going on with the pandemic and the intense focus on CGT. Hopefully it is definitely in the back of HMRC’s mind though as this is something which does need to be addressed sooner rather than later.
ND: There was a slight change towards the start of the pandemic as to how wills were signed. Basically, video conferencing calls were needed in order to verify that the will was properly signed for from the person of the will, as well as two independent witnesses all within a 24-hour period. This came about due to social distancing measures, yet whilst it was completely understandable, for older people trying to sort out their will it did prove to be extremely difficult organising video calls. Whether this will continue after the pandemic remains to be seen but it certainly needs discussing. Another thing I really think needs consideration is a revision of the rules of intestacy. Currently, it involves married couples and civil partners, however societal norms are different to what they were 20 years ago and beyond. The number of couples who co-habit without being married, often with children, is huge yet they are still overlooked by the revenue. Because of not being married or in a civil partnership, their inheritance tax bill is astronomical, which is unfair. This is often the case even when someone chooses to write their will stating they wish to leave their inheritance to their partner. Because spousal exemption isn’t covered, then the IHT bill is a huge burden to leave behind for loved ones. This should really be revised as soon as possible, but I also understand that the government’s priorities are elsewhere due to the pandemic and economy.
We hope this has outlined to you the importance of sorting out your inheritance tax planning, as well as your will. If you require any more information on IHT, wills, or anything accounting related for that matter, please don’t hesitate to get in contact with us at Nordens where one of our trusted advisors would be happy talking you through your query.