Passing on an individual’s estate in accordance with his wishes has always been important, both in terms of ensuring that the right people receive the correct assets (or portion of assets, where these are split between multiple parties) and in terms of ensuring that the maximum value can be passed on through tax planning.
The best advice for an individual is to make a will, in order to ensure that his wishes are fulfilled and to avoid the unpleasant and often expensive resolution process that can affect loved-ones in the aftermath of a poorly planned succession.
It is estimated that more than 59 per cent of the adult population do not have a will (referred to as intestacy) and those who need one most are, in fact, the least likely to have one. At such a distressing time for those affected, having a will can help to make this time more straightforward than it might be otherwise. The last thing relatives want to be doing is making decisions, and so leaving clear instructions can be of great assistance.
In effect since 1 October 2014, the Inheritance and Trustees’ Powers Act 2014 has revised the rules that apply in England and Wales when someone dies without having made a will.
The Act details a number of changes which will apply, depending on the estate owner’s relationship situation and family arrangement at the time of death.
The changes are summarised as below;
| pre-October 2014 | post-October 2104 | |
| Married/civil partnership – NO children of any age | • First £450,000 to surviving spouse • 50% of any residue to surviving spouse • Other 50% of residue divided among any blood relatives of the deceased (parents, siblings, niece etc) | Whole estate to surviving spouse |
Married / civil partnership – HAS children of any age | • First £250,000 to surviving spouse • 50% of residue directly to children • Other 50% of residue held on life ‘interest’ trust to | • First £250,000 to surviving spouse • 50 per cent of residue directly to spouse (‘life interest’ requirement now removed) |
The former rules make reference to a life interest trust. This permitted the spouse to access any income generated by the capital sum in this portion of the estate. However, the spouse was not permitted to make any withdrawals from the capital sum which would subsequently be passed on to any offspring following the death of the spouse. One other small change is that the definition of personal chattels has been amended to refer to any tangible movable property which is not:
• Money or securities for money, or;
• Solely held for investment purposes, or;
• Solely or mainly used for business purposes.
However, the rules that are relevant to the estate of unmarried individuals remain unchanged. In this case the partners of unmarried intestates have no legal entitlement to any of the estate, even if they are financially dependant co-habitees. In this situation, there is a specific order of priority, as follows:
(1) children (and their descendants);
(2) parents;
(3) full siblings (and their descendants);
(4) half siblings (and their descendants);
(5) grandparents;
(6) full siblings of parents of the deceased – uncles and aunts (and their descendants, the first cousins of the deceased);
(7) half siblings of parents of the deceased – half uncles and half aunts (and their descendants);
(8) the Crown
Death and pensions
For pensions, succession is usually managed by nominating beneficiaries through completing an expression of wish form. Should no nomination have been made then the pension trustees or administrators have the discretion to decide how the pension should be paid.
Where the administrators are unable to determine a suitable beneficiary, then they will have no choice other than to pay the lump sum back into the individual’s estate. This would leave the monies liable for inheritance tax and result in the fund being distributed in accordance with the new intestacy rules, if there is no will or no reference to these benefits in the terms of the will (likely to be the case in this situation).
The greater freedom in how pension benefits can be passed on to beneficiaries from April 2015 has created new opportunities to use a pension to manage the practicalities of succession planning. Many will be more comfortable with managing the size of their estates by increasing pension contributions, in order to pass on the value of their estate in a more tax-efficient manner.
Under the new rules taking effect from April next year, pension beneficiaries have the option to receive a lump sum paid either tax free (if the pensioner died before age 75) or less tax of 45 per cent (for tax year 2015/16) or at the beneficiaries’ own marginal rate (from 2016/17 onwards). With the new, lower tax rates being applied (crystallised benefits are currently taxed at 55 per cent), pensions will become an important tool for tax planning.
The age-75 threshold should also be considered when deciding on how benefits could be paid. It may be possible that some beneficiaries may be higher rate taxpayers, whereas others may pay no tax at all. Such discrepancies could be managed by ensuring a greater proportion of the fund is paid to grandchildren, for example, than their parents, when completing a revised nomination form, shortly before the client reaches age 75.
The new rules only apply to lump sums, meaning that income payment options (such as dependant’s annuities) will continue to work within the same tax regime. Although many questions remain unanswered, especially relating to areas such as dependency definitions (for example, will charities or trusts fit this definition?) and what flexibility and allowance rules will be applicable to the beneficiaries themselves. Pensions are looking more attractive as a tax and inheritance planning tool.
However, the new pensions tax freedom does not remove the need for further benefit protection. For example, spousal bypass trusts will retain a useful role to ensure that the member retains full control over the choice of beneficiaries after his death. For example, the member may wish for his spouse to receive payments from the fund (which is permissible, as long as the Bypass Trust’s appointed Trustees are in agreement) but wishes to ensure that the fund is paid to his children, preventing the spouse from redistributing the fund elsewhere (for example, to new family members, following re-marriage).
In both cases, the written instructions must match the client’s current situation and preferences. Should the client have remarried, his/her family become more numerous or the value/composition of their estate changed dramatically, the instructions may no longer be accurate. It is therefore prudent to ensure that instructions are reviewed at regular intervals to ensure both the estate and pension are managed properly.
The new intestacy rules reinforce why it is important to ensure individuals make proper plans regarding the management of their estates, and pensions are now an increasingly important element of an individual’s wealth.
Paul Evans is pension technical manager at Suffolk Life
Key points
* It is estimated that more than 59 per cent of the adult population do not have a will
* For pensions, succession is usually managed by nominating beneficiaries through completing an expression of wish form
* The greater freedom in how pension benefits can be passed on to beneficiaries from April 2015 has created new opportunities to use a pension
