You’ve probably heard the oft-quoted statistic that around two thirds of the UK’s population of adults have not made a Will. But do you know what happens to your assets if you die ‘intestate’? Many are surprised to learn they can actually end up with the Crown.
It might seem unlikely that at the time of your death you would have no living relatives, but the Bona Vacantia list is proof that this is a very real possibility. At the time of writing, there are 8,310 estates on the list of unclaimed estates, with no known heirs. A good number of those on the list were born in the 1960s, 70s and 80s, showing that even those in their thirties, forties and fifties can end up leaving money to the Crown.
It’s perhaps even more surprising that those who live in Cornwall may instead be inadvertently gifting their estate to the Duchy of Cornwall – i.e. Prince Charles – although at least this is ultimately gifted to his benevolent fund which supports charitable projects for the environment, conservation, wildlife, community, art, education and so on.
Of course, the best way to ensure that your money ends up with family or your choice of beneficiaries is to make a Will. It’s a quick, simple and affordable task that avoids heartache and expense, while ensuring your loved ones are provided for.
Where your estate might go
If you die without a Will, the rules of intestacy dictate where your property goes. For example, if you are married with children, your spouse will inherit the first £250,000 of any property that is not held as joint tenants, together with your personal belongings. The balance will then be split 50/50 between your spouse and your children.
‘Gifting’ to the taxman
Consider how this works with an estate worth £1.5k where the family home is held as tenants in common (i.e. each of you owns a specific share, typically 50%). Your spouse inherits £875,000 (£250,000 + half of the balance of £1.25m) free from inheritance tax (due to the spousal exemption). After that, your children inherit £625,000 between them. The Residence Nil Rate Band would be available if your estate includes a share of the family home (currently £150,000, rising to £175,000 in April 2020). However, that would still leave a taxable sum of £475,000, attracting an Inheritance Tax bill of 40% (£190k) that must be paid.
Quite often a couple’s main asset is their property and funding a huge tax bill with no other substantial assets can be a huge practical problem causing significant stress. Further, it is rarely desirable for your children to inherit a large portion of the family home on the first death whilst it is still required by the survivor – especially if you have remarried!
Whilst not every estate will be worth £1.5m, soaring property prices and an aging population mean that this figure is not so remote and the same issues can arise in estates worth far less. The total number of UK estates that are liable for an IHT charge has increased every year since 2009/10, with a 15% increase from 2015/16 to 2016/17 alone.
Had you made a Will and left your assets to your wife first, the whole of the estate would have been exempt from IHT on the first death under the spousal exemption. On your wife’s death, her estate could claim your unused IHT allowance of £325,000 plus the unused RNRB, giving a tax-free sum of £950,000 (£1m from 2020). There may still be an Inheritance Tax bill (although this could be reduced by careful estate planning) but this would only be payable on the second death and could be funded, for example, by selling the family home now it is no longer required.
Assets used up by care or creditors
You might think that the simple solution to the above scenario is to hold the family home as joint tenants so that you and your spouse both own 100%. With this arrangement, on the first death, the survivor automatically inherits the property. However, this is not without its pitfalls – if the survivor remarries, goes into care or falls into debt, the bulk of the estate can be lost to care fees, creditors or to the new spouse and their family. Your children or grandchildren may never see a penny.
Rather than take this risk, the answer may be to set up a trust in your Will which gives your spouse or civil partner a life interest in your share of the home can help preserve a substantial portion of the family wealth for your children and grandchildren.
No provision for unmarried partners
Whilst the law makes at least some provision for married partners where one dies without a Will, unmarried partners have no equivalent rights. Besides property owned as joint tenants (rather than tenants in common) all property will pass to the Deceased’s children or if there are none, other family members. This can leave an unsatisfactory situation where the survivor co-owns with their partner’s family.
It is possible for an unmarried partner to claim against an estate under the Inheritance Act but the outcome of such a claim is by no means certain and any award will be calculated on a ‘maintenance’ basis only.
Step children not provided for
If you raise step children as your own, they will still not benefit from your estate unless you also adopted them.
Former partners may benefit
If you are separated but not divorced, your former partner may receive your entire estate, even if you have been in a long term live-in relationship with someone else for many years. The intestacy rules still apply until your decree absolute is granted and although any new partner may have a claim under the Inheritance Act, such claims are time consuming, stressful and uncertain.
The above range of scenarios shows that every adult should make a Will to ensure those they care about are fully provided for. Speak to our Later Life Planning team to find out more.